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A new decision in the United States District Court for the Southern District of New York raises an interesting nuance in how the courts view and articulate the elements of a cause of action known as “negligent misrepresentation.”  The decision was issued by U.S. District Judge J. Pauloetken in the case of DW Properties v. Live Art Market, Inc., 23-CV-7004(JPO) (SDNY April 22, 2024).

Negligent Misrepresentation

The cause of action for actual fraud requires that the person perpetrating the alleged fraud to know that the fact misrepresented is false and to intend to defraud by conveying the false information to another, as clearly articulated by the New York Court of Appeals and widely recognized:  “The elements of a fraud cause of action consist of ‘“a misrepresentation or a material omission of fact which was false and known to be false by [the] defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.”’ Pasternack v. Laboratory Corporation of America Holdings, 27 NY3d 817 (2016), quoting Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 178 (2011).

The courts also recognize a claim for relief where the communicator of the false information conveyed to another does not actually know the information is false but is careless, or negligent, in ascertaining the accuracy of what is being conveyed.  That cause of action is generally known as negligent misrepresentation.  To dispense with the element of actual knowledge of the falsity, courts require that the communicator have a recognized special relationship with the party receiving the information so as to impose a legal duty to convey truthful information.  This has been clearly explained by the Court of Appeals in Mandarin as follows:

It is well settled that “[a] claim for negligent misrepresentation requires the plaintiff to demonstrate (1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information” (J.A.O. Acquisition Corp. v. Stavitsky, 8 N.Y.3d 144, 148, 831 N.Y.S.2d 364, 863 N.E.2d 585 [2007]; see also Parrott v. Coopers & Lybrand, 95 N.Y.2d 479, 483–484, 718 N.Y.S.2d 709, 741 N.E.2d 506 [2000] ). …

A special relationship may be established by “persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified” (Kimmell v. Schaefer, 89 N.Y.2d 257, 263, 652 N.Y.S.2d 715, 675 N.E.2d 450 [1996] ).

When the Court of Appeals was first presented with the question of whether to impose a duty on someone to exercise care in conveying accurate information to another, the Court was mindful of avoiding endless legal exposure for anyone who communicates and thereby be saddled with a duty to ensure that everything said is 100% accurate.  So the Court observed that the person communicating must at least know that the person to whom the information was conveyed was in fact going to rely on it for a serious purpose, rather than trivial matters. This was laid out by the Court in International Products Inc. v. Erie R. Co., 244 NY 331, 338 (1927), as follows:

Liability in such cases arises only where there is a duty, if one speaks at all, to give the correct information. And that involves many considerations. There must be knowledge, or its equivalent, that the information is desired for a serious purpose; that he to whom it is given intends to rely and act upon it; that, if false or erroneous, he will because of it be injured in person or property. Finally, the relationship of the parties, arising out of contract or otherwise, must be such that in morals and good conscience the one has the right to rely upon the other for information, and the other giving the information owes a duty to give it with care. Jaillet v. Cashman, 235 N. Y. 511, 139 N. E. 714. An inquiry made of a stranger is one thing; of a person with whom the inquirer has entered, or is about to enter, into a contract concerning the goods which are, or are to be, its subject, is another. Even here the inquiry must be made as the basis of independent action. We do not touch the doctrine of caveat emptor. But in a proper case we hold that words negligently spoken may justify the recovery of the proximate damages caused by faith in their accuracy.

Thereafter, as shown by the Mandarin decision quoted above, throughout the years the specific requirement that the information being conveyed must be desired for a serious purpose was not always specifically mentioned by the courts in reciting the elements of the cause of action for negligent misrepresentation, especially in the context of commercial transactions and contractual relationships.  See,e.g., Neurological Surgery, P.C. v Group Health Inc., 224 AD3d 700, 703 (2d Dep’t 2024)(“In order to state a cause of action for negligent misrepresentation, a plaintiff must allege ‘(1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect [or withheld]; and (3) reasonable reliance on the information [or omission]’ (Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 180, 919 N.Y.S.2d 465, 944 N.E.2d 1104 [internal quotation marks omitted]; see Feldman v. Byrne, 210 A.D.3d 646, 650, 178 N.Y.S.3d 525; High Tides, LLC v. DeMichele, 88 A.D.3d 954, 959, 931 N.Y.S.2d 377)”).  Nevertheless, in the context of actual fraud, the information misrepresented or concealed must be “material”—not any trivial matter.  That really incorporates the notion that the information be deemed for a “serious purpose.”  And that obviously must be incorporated into the cause of action for negligent misrepresentation as well.

In the commercial context, courts observe that a standard arms-length business relationship does not give rise to the special type of relationship that triggers the duty to speak with care (or to affirmatively reveal accurate information).  Neurological Surgery, P.C., 224 AD3d at 703, quoting and relying upon Feldman and High Tides.  That was a key focus of the Court in DW Properties. 

DW Properties Decision  

In this case, plaintiff and its principal were collectors of contemporary art.  Defendant was a company that had assisted and provided advice and guidance to plaintiff’s principal in purchasing fine art, selling about 15 pieces to him over the years.  This case concerned a particular purchase of art that plaintiff acquired from defendant.  The main issue was whether plaintiff was legally able to re-sell the artwork when it wished to.  Plaintiff claimed that defendant represented to plaintiff that the resale was unrestricted, but plaintiff later was confronted with restrictions on the resale.

Plaintiff sued for breach of contract and negligent misrepresentation among other claims.  Defendant moved to dismiss for failure to state a claim.

The Court denied the motion as to the claims for breach of contract and negligent misrepresentation among others.

In addressing the claim for negligent misrepresentation, the Court recited the elements as follows:

To state a claim for negligent misrepresentation under New York law, a plaintiff must allege that “(1) the defendant had a duty, as a result of a special relationship, to give correct information; (2) the defendant made a false representation that he or she should have known was incorrect; (3) the information supplied in the representation was known by the defendant to be desired by the plaintiff for a serious purpose; (4) the plaintiff intended to rely and act upon it; and (5) the plaintiff reasonably relied on it to his or her detriment.” Hydro Investors, Inc. v. Trafalgar Power Inc., 227 F.3d 8, 20 (2d Cir. 2000).

Note that the Court cited Second Circuit authority and included the element requiring the “serious purpose” language.

In any event, defendant contended plaintiff had not satisfied the first element—the “special relationship” required to impose a duty for negligent misrepresentation claims.  Defendant relied upon cases involving arms-length transactions, arguing that as a matter of law, no superior or special knowledge could apply in the context of the sale of art.  The Court rejected that argument, noting: “By contrast, courts have found the existence of a special relationship when there is an ongoing relationship of advice and reliance between two parties.”

Applying the law to the allegations there, the Court found

there was more than just a “typical arm’s length business  transaction” here, suggesting the possibility of a special relationship. Id. at 103. Daskal [plaintiff’s principal] purchased approximately fifteen artworks from Live Art over a period of time (FAC ¶ 17; ECF No. 22 at 11); Live Art was the one that approached Daskal about the opportunity to purchase the Painting (FAC ¶ 18); Live Art informed Daskal that the Painting “had the most upside potential for profit in the event of a resale” (id.); Live Art counseled Daskal about the marketing potential and estimated future sales prices of the Painting (id. ¶ 21); and Live Art “continuously attempted to communicate directly with Mr. Daskal to induce him to purchase the painting through WhatsApp messages and phone calls” (id. ¶ 23). “Given that a determination of whether a special relationship exists is essentially a factual inquiry, these allegations are sufficient to overcome a motion to dismiss.” Suez, 250 F.3d at 104.

The Court also found that the information conveyed was “material.”

Commentary

While courts are not always consistent in expressing the elements of the cause of action for negligent misrepresentation, the core essence of that claim remains regardless of how the elements are specifically described.  The context and subject matter of the alleged false information must be more than trivial, whether that is viewed as embodied in the element of materiality or “serious purpose.”  The person making the false statement at least must know that what is being conveyed is going to be relied upon by another in an important context so that every statement ever made is not subject to a legal duty for which damages can be imposed.

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