An important theme running through the way courts view fraud claims is that the party claiming it has been defrauded must show it acted prudently in an effort to avoid adverse consequences from the alleged fraud.  One example is the element of reasonable reliance (see my posts on this element for examples).  Two cases decided this past week illustrate the theme in different contexts.

Duty to Read Applicable Contract

In Vestal v Pontillo, 2018 NY Slip Op 01236 (3d Dep’t Decided on February 22, 2018), the Third Department reversed the lower court’s refusal to dismiss claims attempting to allege fraud and negligent misrepresentation based upon the element of reasonable reliance. Plaintiff was the beneficiary under a life insurance policy.  The relevant defendant was an agent who assisted the applicant of the life insurance policy in applying for the policy.  The applicant of the policy made misrepresentations of his health history in the application and when he died, the insurance company timely disclaimed based upon those material misrepresentations.  The plaintiff beneficiary then sued the agent on various claims, including that the agent allegedly committed fraud in vouching for the validity of the policy and how it was applied for and/or negligently misrepresented such validity.  Plaintiff focused on the defendant’s “act of delivering the application and policy documents to both decedent and her as an assurance that it had been issued upon an accurate application and was valid.”

The lower court denied the motion to dismiss these claims, but the Third Department reversed and dismissed them.  The Third Department started the analysis by focusing on the element of reasonable reliance: “Turning to the attacks of [defendant] upon plaintiff’s claims for negligent misrepresentation and concealment of material facts and fraud, ‘[r]easonable reliance on the alleged misrepresentations is a necessary element of both fraudulent and negligent misrepresentation’ (Ruffino v Neiman, 17 AD3d 998, 1000 [2005], appeal dismissed 5 NY3d 823 [2005], lv denied 6 NY3d 705 [2006]; see Hobler v Hussain, 111 AD3d 1006, 1007 [2013]).”

The Third Department then pointed out that plaintiff could not blame the agent for the proper disclaimer of the insurance based upon the material misrepresentations in the application, given the express terms of the policy allowing for the revocation of the insurance under these circumstances:

Even accepting those allegations as true, however, the most that could reasonably be taken from the act of delivery was that an application had been submitted to, and a policy issued by, ReliaStar. The policy documents explicitly allowed ReliaStar, within two years of the policy’s issuance, to contest the validity of the policy upon the ground of material misrepresentations in the application. Had plaintiff, an attorney, reviewed the delivered policy documents, she could easily have discovered the threat that decedent’s obvious misstatements in the application posed under the terms of the policy. “[W]here the alleged misrepresentations conflict with the terms of a written agreement, there can be no reasonable reliance as a matter of law” and, accordingly, Supreme Court should have dismissed the claims for negligent misrepresentation and fraud against [defendants] (Ruffino v Neiman, 17 AD3d at 1000; see Pinney v Beckwith, 202 AD2d 767, 768-769 [1994]; Bango v Naughton, 184 AD2d 961, 963 [1992]).

Duty to Inquire to Prevent Fraud

In the other case, decided by Justice Saliann Scarpulla of the New York County Commercial Division, CM Collections, Inc. v ASL Holdings LLC, 2018 NY Slip Op 30295(U) (N.Y. Co. February 20, 2018), the court dismissed claims of “fraud/failure to disclose.”

The plaintiff entered into a licensing agreement with defendant to use defendant’s trademarks in the sale of certain goods.  Plaintiff alleged that defendant failed to disclose its true intention of devaluing the trademarks by selling the goods in lower markets, thereby depriving plaintiff of the full value of the license.  Plaintiff attempted to assert a cause of action for fraud or “failure to disclose.”  The court dismissed this claim based upon (1) the disclaimers in the license agreement, (2) the absence of any legal duty on the part of the defendant to disclose what plaintiff claimed was its hidden intentions, and (3) the plaintiff’s own failure to inquire diligently about defendant’s intentions before it entered into the contract.

In addressing plaintiff’s claim of fraudulent concealment, the court noted: “For a claim of fraudulent concealment or failure to disclose, a plaintiff must allege the same elements [of fraud] and further allege ‘that the defendant had a duty to disclose material information and that it failed to do so’ (Gomez-Jimenez v New York Law Sch., 103 AD3d 13, 18 [1st Dept 2012]).”  The court then focused on the “special facts doctrine,” which would give rise to a duty to disclose, and observed as follows:

“Under the special facts doctrine, a duty to disclose arises where one party’s superior knowledge of essential facts renders a transaction without disclosure inherently unfair” (Swersky v Dreyer & Traub, 219 AD2d 321, 327 [1st Dept 1996] [internal quotation marks and citations omitted]). “[T]he doctrine requires satisfaction of a two-prong test: that the material fact was information peculiarly within the knowledge of [the defendant], and that the information was not such that could have been discovered by [the plaintiff] through the exercise of ordinary intelligence” (Jana L v West J 291 h Street Realty Corp., 22 AD3d 274, 278 [1st Dept 2005] [internal quotation marks and citations omitted]). A plaintiff must at least inquire of a defendant regarding the matters allegedly concealed (id.). “It is insufficient for [a plaintiff] to simply make the conclusory statement that the information of an incident giving rise to liability could not have been obtained [by it] through the exercise of ordinary intelligence” (id. [internal quotation marks and citations omitted]).

The court then ruled that there was no duty to disclose because (1) there was no fiduciary duty on the part of the defendant to disclose and (2) plaintiff had the opportunity to inquire of defendant and thereby learn of its intentions before entering the contract.  Of course, if plaintiff did so inquire and defendant then made affirmative, material misrepresentations to plaintiff, plaintiff would have been able to base a claim of fraud on those misrepresentations.  Here, on the contrary, as the court further noted, the contract contained specific disclaimers of the nature and scope of defendant’s use of the trademark and its value.


It is important in seeking to preserve claims of fraud that a party exercise appropriate and reasonable prudence in protecting itself before acting. Before a contract is entered, inquiry should be made of whatever is deemed important or relevant to the contemplated transaction and specific representations should be included to the extent they are being relied upon.