Commercial Division Blog
Fraud Plaintiff Was Reasonable in Relying on Opinion Letter Without Doing Independent Appraisal
On February 10, 2017, the First Department issued a decision in Remediation Capital Funding LLC v. Noto, 2017 NY Slip Op. 01119, holding that a fraud plaintiff was reasonable in relying on an opinion letter without doing an independent appraisal, explaining:
As relevant to this appeal, plaintiff seeks to assert misrepresentation claims against Noto. In the order appealed from, Supreme Court granted Noto's motion to dismiss the original complaint, which asserts a cause of action for fraud against Noto, and denied plaintiff's cross motion to amend its complaint to add a cause of action for negligent misrepresentation, primarily on the ground that plaintiff could not establish justifiable reliance on any alleged misrepresentations, as a matter of law, because it admittedly had not conducted an independent appraisal or any due diligence with respect to the loan transaction. Upon plaintiff's appeal, we reverse.
A sophisticated party is generally required to exercise due diligence to verify the facts represented to it before entering into a business transaction. The Court of Appeals has recognized, however, that, where a plaintiff has gone to the trouble to insist on a written representation that certain facts are true, it will often be justified in accepting that representation rather than making its own inquiry. In this case, plaintiff alleges that it made the loan to Sheldrake in reliance on Noto's opinion letter, which was specifically addressed to plaintiff, in which Noto opined that the loan transaction would not put either Sheldrake or Attia into breach of any preexisting contract or agreement to which either was a party. Plaintiff alleges that this representation was false, inasmuch as the undisclosed 2005 letter agreement required Attia to maintain a $2 million cushion of "unencumbered equity" in the property in any refinancing, and — given that the true value of the property was only $1.9 million, based on the terms of the undisclosed 2005 transaction — plaintiff's $6.6 million loan to Sheldrake wiped out any such equity in the property.
Like the plaintiffs in DDJ Mgt., plaintiff in this case made a significant effort to protect itself against the possibility of falsehood by obtaining a written opinion letter from Noto, the borrower's attorney, making at least one material representation that, based on the allegations of the complaint, was inconsistent with the actual value of the property. As in DDJ Mgt., on a motion addressed to the sufficiency of the pleadings, it cannot be held as a matter of law that plaintiff was required to do more, and whether plaintiff was justified in relying on Noto's opinion letter is a question for the trier of fact.
(Internal quotations and citations omitted).