A party attempting to assert a fraud claim has certain significant responsibilities itself to take prudent and reasonable action in an effort to protect itself from the fraudulent conduct of others. This principle is embodied in the element of “reasonable or justifiable reliance” in alleging fraud. This duty of self-protection also applies to determining whether the party attempting to assert fraud receives the benefit of the extended two-year period under the statute of limitations, which affords an additional period in which to claim fraud if the fraudulent conduct was not actually discovered or could not have been discovered with reasonable diligence. Courts have considered whether the duty of self-protection requires a party trying to claim fraud to investigate publicly-available information. For a summary of these principles, see, for example, my post, Publicly Available Information Sufficient to Put Plaintiff on Notice of Fraud for Statute of Limitations to Run.
As I have explained in various posts in this Blog, the courts are not entirely consistent in determining whether a fraud claim is barred because the plaintiff could have discovered the false or concealed information through publicly-available information independent of any misrepresentations made or information concealed by the defendant. The recent decision of the Appellate Division, First Department, in Mizrahi v YMZ Realty LLC, 2022 NY Slip Op 01741 (1st Dep’t Decided March 15, 2022), follows a long line of decisions in that judicial department rejecting attempted fraud claims because plaintiff could have discovered the misinformation through public records.
The Mizrah case is interesting because it involves concepts relating to the legal duty (of the party being accused of fraud) affirmatively to disclose information on the one hand, and the legal duty (of the party claiming fraud) to investigate facts on the other hand.
In Mizrah, unfortunately, the bonds of blood did not prevail over apparent greed and deceit: The parties were two brothers. I will refer to them as “P” and “D.” They formed a corporation to hold title to real property. They named P the sole record owner of the corporation, but agreed that D would have a “beneficial” interest in the corporation so that he would receive 40% of the proceeds (and P would receive 60%) of any future sale of the real property.
D then lands a purchaser for the real property and he tells his brother P that the buyer will pay $13 million. D also convinces P to transfer 100% of his stock in the corporation that owns the real property to a new entity owned only by D. Since D represented to his brother that the sale was for $13 million, D paid P his 60% based upon a sale of $13 million. Two months later, the corporation that owned the real property sold it for $16.5 million ($3.5 million more than what D had told P was the sale price).
From April 2013, when the transactions occurred, to May 2019, P proceeded along his merry way, thinking that he and his brother had scored a handsome sum for their investment. Then, in May 2019, P’s accountant received a notice from the New York State Department of Taxation and Finance, Income/Franchise Tax Field Audit Bureau, concerning a 2013 audit, which revealed the actual sale price of the real property for $16.5 million.
Of course, P was not pleased with his brother’s shenanigans. P sued D alleging that P did not know that the ultimate sale was for $3.5 million more than was contemplated by the parties’ stock purchase agreement, that D defrauded him and that the fraud remained concealed, until May 2019 when the audit came up.
Since P brought the case more than six years from the date of the alleged fraudulent conduct, D returned the favor of being sued by his brother with a motion to dismiss all of P’s claims against him because they were instituted too late, and barred by the statute of limitations. Should D get away with cheating his brother in such a deceitful way? Both the court below and the First Department said yes. Why? They found that P could only blame himself for not verifying what his brother had told him about the sale price by checking public records of the sale.
New York City has a publicly-available online database containing records pertaining to real property located there. It is called “Automated City Register Information System,” commonly known as “ACRIS.” ACRIS contains a wealth of information and should be a source for all sorts of due diligence.
In affirming the dismissal of P’s claims for fraud against D, the First Department relied upon the long-standing legal principles of self-protection that I mentioned above:
The motion court correctly dismissed the amended complaint on the ground that it is barred by the statute of limitations. The report on ACRIS shows that the property was sold on April 10, 2013 for $16.5 million, not $13 million, as [P] had allegedly been informed. As a result, publicly available information was sufficient to put him on inquiry notice of possible fraud. The amended complaint fails to assert, and plaintiff does not dispute, that the alleged fraud could have been discovered with due diligence, such that the two-year discovery rule tolling causes of action for fraud would not apply (CPLR 213; CPLR 203[g]; see Aozora Bank, Ltd. v Deutsche Bank Sec. Inc. v Deutsche Bank Sec. Inc., 137 AD3d 685, 689 [1st Dept 2016]; Goldberg v Manufacturers Life Ins. Co., 242 AD2d 175, 180 [1st Dept 1998], lv dismissed in part, denied in part 92 NY2d 1000 ).
Further, because the courts rejected the fraud claim, they also found all of the other causes of action—aiding and abetting fraud, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and unjust enrichment—were time-barred as well, citing “Kaufman v Cohen, 307 AD2d 113, 119 [1st Dept 2003]; cf. Sabourin [*2]v Chodos, 194 AD3d 660, 662 [1st Dept 2021]).”
There is a lot to take away from the Mizrah case results. First, unfortunately, even the bonds of blood do not dispense with what I recommend all must follow at all times: To “ACT”: Assume nothing. Trust no one. Check everything. This is especially true when the means of verifying information is publicly-available, such as on ubiquitous internet databases. In any event, interestingly, the First Department did not mention the concept of the duty to reveal material information that a fiduciary owes. Here, P certainly could have argued that D owed fiduciary duties to him insofar as they were mutual owners of the real property by virtue of the deal they had to share in the proceeds of any sale. Also, typically, family relationships could give rise to fiduciary duties. These concepts, if effectively argued, could very well have played a role in considering P’s failure to verify what D had told him.