As I have chronicled, attempted civil fraud claims are particularly vulnerable to getting dismissed in the early stages of cases if the court finds that the party seeking to claim fraud did not justifiably or reasonably rely on the alleged fraudulent statements in sustaining damages.  See, e.g., Fraud Claims Must be Dismissed for Lack of Reasonable Reliance; First Department Continues to Affirm Dismissal of Fraud Claims Based Upon Lack of Justifiable Reliance; Fraud Claims Can be Summarily Dismissed Where Reasonable Reliance is Lacking.

Courts can be particularly unforgiving if information was available to uncover the alleged fraudulent misrepresentations before the claimant changed its position in reliance on the false statements.  A recent decision rendered by the Appellate Division, Fourth Department, provides a stark example in affirming the dismissal of an attempt to rescind a divorce settlement agreement where the wife had information that would have uncovered the husband’s allegedly false representations:  Van Ostrand v Latham, 2023 NY Slip Op 06629 (4th Dep’t Decided Dec. 22, 2023).

Van Ostrand

Plaintiff-wife and defendant-husband entered into a settlement of a divorce action.  In the written settlement agreement, the husband denied “any financial wrongdoing ‘with regard to assets involving investments made over the course of the marriage, including but not limited to a total of 20 gold ingots which [defendant] represents were sold by him to finance the construction of an addition to the former marital residence.’ That section further provided that defendant ‘represents that 20 ingots was the total quantity purchased and no ingots remain.’”

Plaintiff subsequently sought to rescind the divorce settlement claiming the defendant defrauded her into signing it by misrepresenting the true state of affairs concerning the gold ingots.  In particular, plaintiff alleged “that she obtained 53 invoices that reflected purchases of 120 gold ingots by defendant during the marriage, despite his representation that only 20 gold ingots ever existed. Plaintiff further alleged that she obtained various financial records showing that certain marital funds that defendant had exclusive control over were not accounted for, and she set forth in detail six different instances of missing funds. As a first cause of action, plaintiff asserted that defendant committed fraud by making a material misrepresentation of an existing fact in” the settlement agreement.  The court below dismissed the case and the Fourth Department affirmed.

As I have observed, it is particularly challenging in trying to avoid any type of settlement agreement, as the courts wish to promote the fair and knowing resolution of disputes.  See Challenging Releases and Settlements Based on Fraudulent Inducement is a Challenge. So the plaintiff in Van Ostrand had an uphill battle to begin with. Once the courts heard that plaintiff actually had sufficient information with which to ferret out the allegedly fraudulent statements, the case was doomed.  Even though plaintiff alleged defendant had “exclusive control over” certain key financial records, the courts found plaintiff nevertheless had sufficient information and means to learn the true facts:

We conclude the [lower] court properly dismissed the complaint because defendant’s evidentiary submissions and plaintiff’s admissions to them conclusively established that she has no cause of action for fraud inasmuch as she could not have justifiably relied on the alleged fraudulent representations (see generally Suchow, 157 AD3d at 1016-1017; cf. Kumar v Kumar, 96 AD3d 1323, 1326 [3d Dept 2012]). With respect to the alleged missing funds, plaintiff was aware before she entered into the Agreement that the financial records in her possession and the reports from the certified public accountant she retained showed that there was unaccounted-for money, specifically the six instances set forth in the complaint. With respect to the gold ingots, the invoices show that the ingots were purchased by the business jointly owned by plaintiff and defendant and not, as plaintiff alleged in the complaint, by defendant personally. In any event, plaintiff admitted that she was aware that there were at least 24 gold ingots at the time defendant represented that there were only 20. In addition, plaintiff admitted that she had access to the financial records during the marriage, and indeed filed all of them in “banker boxes” that were kept in the marital residence, which would include the 53 invoices showing the purchase of 120 ingots.

Some Strategic Considerations for Potential Remedies

So, as the Fourth Department’s decision in Van Ostrand confirmed, adequately alleging and establishing the element of reasonable reliance is critical when seeking to rescind an agreement based upon alleged fraudulent inducement.  There is another strategy to consider, however, that could potentially provide remedies when contractual representations prove false.  In Van Ostrand, the defendant husband actually made the express representations in the settlement agreement itself.  While factual contractual representations can in fact form the basis of the tort of fraud, all of the elements of the cause of action for fraud would need to be established, including reasonable reliance. See, e.g., Second Department Affirms Decision Recognizing that Breach of Contractual Representations and Warranties Can Amount to the Tort of Fraud.

However, if the factual representations amount to warranties in the contract itself, a claim for breach of contract may be established, i.e., if the matter represented is actually false.  That is, a party to a contract is permitted to enforce the contract and seek damages if what was warranted is actually untruthful, and the sole fact that it was represented as such is sufficient to recover damages without showing that the truth of the statement was actually relied upon by the other party, whether reasonable or not.  See, e.g., the leading New York Court of Appeals decision in CBS Inc. v. Ziff-Davis Pub. Co, 75 N.Y.2d 496 (1990).  See also: Kitchen Winners NY Inc. v. Rock Fintek LLC, 22 Civ. 5276 (PAE) (S.D.N.Y. Mar. 31, 2023).  For an interesting discussion of representations and warranties in a contract and their effects, see S. SepinuckThe Virtue of “Represents and Warrants”: Another View