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Current Developments in the Commercial Divisions of the
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Posted: August 30, 2014

Sophisticated Party Cannot Use Lack of Time as Excuse for Failure to Exercise Due Diligence

On August 6, 2014, Justice Sherwood of the New York County Commercial Division issued a decision in Remediation Capital Funding LLC v. Noto, 2014 NY Slip Op. 32157(U), dismissing a fraud claim for failure to show due diligence.

In Remediation Capital Funding , the plaintiffs asserted claims of fraud and fraudulent conveyance in connection with a failed real estate transaction. One of the defendants moved to dismiss. The court granted the motion, holding, among other things, that the plaintiff had failed to show that its reliance on the misrepresentations it alleged was justifiable because it failed to exercise due diligence, explaining:

To make a prima facie claim of fraud, the complaint must allege misrepresentation or concealment of a material fact, falsity, scienter on the part of the wrongdoer, justifiable reliance and resulting injury. Reliance must be found to be justifiable under all the circumstances before a complaint can be found to state a cause of action in fraud.

The essence of the fraud claim is based on the assertion that defendants misrepresented the value of the Properties upon which [the plaintiff] had made the Loan. [The plaintiff] emphasizes that it did not perform any due diligence of its own in assessing the Properties’ value, because [the plaintiff] lacked sufficient time to obtain its own appraisal. This assertion is unavailing as a basis for a finding of justifiable reliance for a sophisticated party . . . .

[The plaintiff] does not dispute the assertion that it had the means to discover the actual value of the Properties by conducling its own appraisal. That it chose not to so because it wanted to participate in a rushed transaction indicates that it willingly assumed the business risk that the facts may not be as represented. [The plaintiff] has not shown, or even alleged, that it was unable to obtain its own appraisal of the value of the Property so as to adhere to its strategy of maintaining a 50% loan-to-value to ensure an equity cushion that would protect it from market downturns. As stated by the Court of Appeals:

If the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him of knowing by the exercise of ordinary intelligence the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.

On the face of the complaint [the plaintiff’s] reliance on the alleged misrepresentations by [the moving defendant] was unreasonable as a matter of law. As such, [the plaintiff] has failed to establish reasonable reliance.

. . . Here, . . . the valuation of the Property was not something that was within the particular knowledge of Noto and the other defendants. Nevertheless, [the plaintiff] chose to rely on defendant’s rendition of the value of the Property.

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

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