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Current Developments in the Commercial Divisions of the
New York State Courts
Posted: August 16, 2014

Lack of Due Diligence no Bar to Fraud Claim When no Amount of Diligence Would have Uncovered Fraud

On August 4, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Higher Education Management Group, Inc. v. Aspen University Inc., 2014 NY Slip Op. 32106(U), declining to dismiss a fraud claim for lack of due diligence when no amount of diligence would have uncovered the fraud.

Counterclaim defendants contend that counterclaim plaintiffs are precluded from showing justifiable reliance because they were either aware of the allegedly false and undisclosed information, or such information was readily available to them. The law in New York is clear that if knowledge of the facts underlying the allegation of fraud are in the sole possession of counterclaim defendants, and due diligence would not have uncovered them, a counterclaim defendant cannot assert counterclaim plaintiffs’ lack of due diligence to defeat reliance. Here, it is alleged that Mr. Spada secretly pledged his stock to Aspen. No amount of due diligence is likely to have discovered this element of the alleged fraud. The court is satisfied that Aspen would not have been able to discover the alleged fraud at the time of the Merger. Aspen has plead the element of reasonable reliance with particularity, as the facts relating to the fraud were in the sole possession of Mr. Spada, and not discoverable through any investigation by Aspen.

(Internal quotations and citations omitted) (emphasis added).

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