In my last post, I reviewed two Appellate Division, Second Department decisions rendered on the same day that came out with different results as to whether fraud claims should be summarily dismissed based upon the lack of justifiable reliance. I discuss here a recent Second Department decision (Citibank, N.A. v Potente, 2022 NY Slip Op 06464 (2d Dep’t Decided Nov. 16, 2022)) that in my view was an easy one to call: A mortgagor attempted to ward off a mortgage foreclosure action by claiming it was fraudulently induced to give the mortgage based upon what it alleged was an inflated appraisal of the mortgaged property provided to it by the mortgage lender.  The lower court denied the mortgagor summary judgment in its effort to avoid the mortgage, and the Second Department affirmed.

Potente Facts

Citibank sued to foreclose a mortgage that was based upon a consolidation, modification and extension agreement (CEMA) that consolidated several mortgages on real property in Nassau County.  Citibank then moved for summary judgment, and in response, the defendant mortgagors cross-moved to challenge several aspects of the plaintiff’s prima facie case, and also to rescind the mortgage, claiming they were fraudulently induced to sign it.  In support of the cross motion, they submitted an affidavit from one of the defendants in which he stated that he and the other defendant relied on an appraisal provided by the plaintiff, valuing the subject property at $2.3 million, in deciding to enter into the CEMA. The defendants also submitted their own retrospective appraisal of the subject property, valuing it at $1.33 million as of the date they entered into the CEMA.

The lower court granted plaintiff’s motion for summary judgment and denied the defendants’ cross-motion.  On appeal, the Second Department found issues of fact on both motions, so it reversed summary judgment in favor of the plaintiff, and affirmed the denial of the defendants’ motion.

Justifiable Reliance on Appraisal Report Not Established as a Matter of Law

In determining defendants’ claim of fraudulent inducement, the Second Department zeroed in on the element of justifiable reliance, finding that defendants had not established as a matter of law that they reasonably relied on the alleged inflated appraisal report in entering into the CEMA:

A party asserting a claim based upon fraudulent misrepresentation must establish (1) a material misrepresentation of a fact, (2) knowledge of its falsity, (3) an intent to induce reliance, (4) justifiable reliance, and (5) damages (see Eurycleia Partners, LP v Seward & Kissel, LLP, 12 NY3d 553, 559; Benjamin v Yeroushalmi, 178 AD3d 650, 654). The question of what constitutes reasonable or justifiable reliance is “‘always nettlesome because it is so fact-intensive'” (DDJ Mgt., LLC v Rhone Group L.L.C., 15 NY3d 147, 155, quoting Schlaifer Nance & Co. v Estate of Warhol, 119 F3d 91, 98 [2d Cir]). “‘[I]f the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him [or her] of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he [or she] must make use of those means, or he [or she] will not be heard to complain that he [or she] was induced to enter into the transaction by misrepresentations'” (DDJ Mgt., LLC v Rhone Group L.L.C., 15 NY3d at 154, quoting Schumaker v Mather, 133 NY 590, 596; see ISS Action, Inc. v Tutor Perini Corp., 170 AD3d 686, 688; Cervera v Bressler, 126 AD3d 924, 926). “Where, however, a [party asserting fraud] has taken reasonable steps to protect itself against deception, it should not be denied recovery merely because hindsight suggests that it might have been possible to detect the fraud when it occurred” (DDJ Mgt., LLC v Rhone Group L.L.C., 15 NY3d at 154). Here, the defendants failed to establish their prima facie entitlement to judgment as a matter of law, as they failed to demonstrate the absence of triable issues of fact as to whether, inter alia, they reasonably relied upon the plaintiff’s allegedly inflated appraisal report before entering into the CEMA (see DDJ Mgt., LLC v Rhone Group L.L.C., 15 NY3d at 155-156).


I have commented often that fraud cases can and should be dismissed summarily (at the pleadings stage or on summary judgment) where the uncontroverted record establishes that the party claiming fraud has not acted justifiably in relying upon the alleged misrepresentations. In Potente, it was the party claiming fraudulent inducement that was seeking summary judgment to rescind the CEMA. In that instance, it was quite easy to deny summary judgment based upon the defendants’ claimed reliance on an appraisal report of the mortgaged property. Obviously, defendants had the means to assess the value of the property themselves, and obtain their own appraisal before signing the CEMA. In fact, in their very cross-motion, the defendants offered their own appraisal, claiming the value was significantly less. Based upon these facts, both the lower court and the Second Department correctly ruled that the defendant mortgagors were not entitled to summary judgment to rescind the CEMA.