In soundly sustaining the denial of summary judgment to a defendant attempting to dismiss a foreclosure action based upon a defense of fraud, a new decision of the Appellate Division, Second Department, relied upon a long-standing principle applicable to any claim (or defense) of fraud under New York law: The party claiming it was misled by the fraud of another cannot unreasonably rely on the alleged misrepresentation or omission. That means that when the fraud relates to a contract between the parties, any party that signs that contract is bound by the contents, and cannot thereby claim to have been defrauded where the express terms of the contract contradict or dispel the alleged fraud.
I have chronicled many cases over the years that have explained and relied upon this basic principle. See:
- Express Terms of Contract Render any Reliance on Alleged Contrary Representations Unreasonable
- Alleged Inability to Read English Insufficient Ground to Avoid Executed Release
- New Cases Show the Critical Importance of the Duty of Self-Protection
- Failure to Read Life Insurance Policies or Applications Renders Fraud Claim Against Broker Defective as a Matter of Law for Lack of Reasonable Reliance
- Fraud Claims Barred by Signed Contracts Even if Not Read or Even Understood
- Decisions Not Entirely Consistent in Addressing Justifiable Reliance for Fraud Claims
- Duties of Prudence Expected of Those Attempting to Allege Fraud
- Second Department Rejects Claim That Party Was “Tricked” Into Signing Note and Mortgage
Second Department New Decision
In U.S. Bank N.A. v Guido, 2025 NY Slip Op 01004 (2d Dep’t Decided Feb. 19, 2025), a married couple signed loan documents to satisfy an existing open-end mortgage, including a new credit line mortgage (CLM). Subsequently, the lender/mortgagee under the CLM brought an action to foreclose upon the CLM. The wife asserted, among other things, a defense of fraud, and moved for summary judgment to dismiss the complaint against her. The court below denied the motion and the Second Department affirmed.
The wife alleged that the lender’s representatives informed her that it was necessary for her to execute the CLM to effectuate the satisfaction of the prior mortgage but that she was not informed of any need to execute a note in connection with the CLM, nor was she informed that, on the same day, her then husband executed such a note and a “maximizer agreement,” thereby obtaining a line of credit issued to him, individually, and without her knowledge, secured by the CLM on the property. The CLM was executed by both the wife and her then-husband, but the maximizer agreement was executed solely by the husband. While the wife claimed not to have known about the husband’s separate line of credit secured by the CLM, the CLM expressly identified the line of credit being secured by the mortgage.
On appeal from the denial of the wife’s motion for summary judgment seeking to dismiss the complaint against her, the Second Department recited the basic elements of the fraud defense as follows:
“‘Generally, to state a counterclaim or affirmative defense sounding in fraud, a defendant must allege that (1) the plaintiff made a representation or a material omission of fact which was false and the plaintiff knew to be false, (2) the misrepresentation was made for the purpose of inducing the defendant to rely upon it, (3) there was justifiable reliance on the misrepresentation or material omission, and (4) injury'” (Emigrant Mtge. Co., Inc. v Public Adm’r of Kings County, 207 AD3d 437, 441, quoting Shah v Mitra, 171 AD3d 971, 975).
The Second Department then flatly rejected the wife’s attempt to avoid the CLM by way of summary judgment, ruling that “because the CLM explicitly stated that an active line of credit in the amount of $250,000 was being secured, the defendant failed to establish justifiable reliance (see Prompt Mtge. Providers of N. Am., LLC v Zarour, 155 AD3d 912, 914). Accordingly, the defendant’s submissions were insufficient to demonstrate, as a matter of law, that her execution of the CLM was procured through fraud (see generally id.).”
Commentary
Justifiable reliance is an essential element of any attempt to establish fraud—whether by way of an affirmative claim or a defense. As such, when a contract signed by a party contradicts or otherwise dispels the alleged misunderstanding on which the fraud is based, any reliance upon alleged fraudulent conduct would be unreasonable. In Guido, the fraud defense did not have a chance of success given the express content of the CLM. Summary judgment would appear to have been warranted—dismissing—that defense.