Commercial Division Blog

Posted: May 18, 2020 / Categories Commercial, Fraud/Misrepresentation

Fraud Plaintiff's Due Diligence Sufficient When it Considered the Facts Reasonably Available to It

On February 19, 2020, Justice Borrok of the New York County Commercial Division issued a decision in Itria Ventures LLC v. Provident Bank, 2020 NY Slip Op. 30494(U), holding that a plaintiff bringing a fraud claim had alleged sufficient due diligence when it considered the facts reasonably available to it, explaining:

The Itria Parties argue that Provident cannot, as a matter of law, establish justifiable reliance because it is a sophisticated party and it had the means to conduct its own independent due diligence. The court, however, disagrees.

The First Department has held that a sophisticated plaintiff cannot establish that it entered into an arm's length transaction in justifiable reliance on alleged misrepresentations if that plaintiff failed to make use of the means of verification that were available to it. But in this case, Provident alleges that it did make use of the means of verification that were available to it. For example, Provident alleges that it used its in-house field examiners and an outside auditing firm to conduct due diligence. In addition, Provident alleges its efforts to verify the Due Diligence Materials and information provided by the Itria Parties were stymied by the Itria Parties' active concealment of critical information and by their misrepresentations of material fact. Thus, Provident reasonably relied on the Itria Parties' misrepresentations in making the loan to Lotus Exim and in continuing to extend additional financing, and that it would not have done so but for the Itria Parties' fraudulent conduct and would have frozen all advances and pursued its available remedies if it was not defrauded.

Here, unlike in HSH Nordbank AG, the pleadings establish that the true nature of the risk being assumed by Provident could not have been ascertained from reviewing market data or other publicly available information, as information critical to assessing the risk was peculiarly within the Itria Parties' knowledge. In any event, as the Court of Appeals has observed, the question of what constitutes reasonable reliance is not generally a question to be resolved as a matter of law on a motion to dismiss.

(Internal quotations and citations omitted).

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements or rules, including the rule that a sophisticated businessperson's reliance on a false statement must be reasonable. Contact Schlam Stone & Dolan partner John Lundin at if you or a client think you have been defrauded, or if someone has accused you or a client of defrauding them.