Commercial Division Blog

Posted: July 4, 2021 / Categories Commercial, Fraud/Misrepresentation, Negligence

Negligent Misrepresentation Claim Fails for Failure Adequately to Allege Special Relationship

On July 1, 2021, Justice Platkin of the Albany County Commercial Division issued a decision in Berkshire Bank v. Pioneer Bank, 2021 NY Slip Op. 50619(U), holding that a negligent misrepresentation claim failed because it did not adequately allege a special relationship between the plaintiff and defendant, explaining:

A fiduciary relationship exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation. Such a relationship, necessarily fact-specific, is grounded in a higher level of trust than normally present in the marketplace between those involved in arm's length business transactions.

As explained by the Court of Appeals:

Generally, where parties have entered into a contract, courts look to that agreement to discover the nexus of the parties' relationship and the particular contractual expression establishing the parties' interdependency. If the parties do not create their own relationship of higher trust, courts should not ordinarily transport them to the higher realm of relationship and fashion the stricter duty for them. However, it is fundamental that fiduciary liability is not dependent solely upon an agreement or contractual relation between the fiduciary and the beneficiary but results from the relation

A special relationship may be established by persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified. In the commercial context, courts should consider whether the person making the representation held or appeared to hold unique or special expertise; whether a special relationship of trust or confidence existed between the parties; and whether the speaker was aware of the use to which the information would be put and supplied it for that purpose.

A duty to speak with care exists when the relationship of the parties, arising out of contract or otherwise, is such than in morals and good conscience the one has the right to rely upon the other for information. As with fiduciary relationships, however, an arm's length transaction between sophisticated parties ordinarily precludes a finding of a special relationship.

The Participation Agreements assented to by plaintiffs expressly disclaim the formation of any relationship with Pioneer concerning the sale of participation interests other than that of seller and purchaser. These Agreements constitute a sale of the Purchaser's Interest by the Seller to the Purchaser and shall in no way be construed as creating any other relationship than Seller and participant between the parties.

Further, plaintiffs represented and warranted to Pioneer that, to the extent deemed necessary, they have conducted an independent assessment of the Borrower and any guarantors, including without limitation an assessment relating to the creditworthiness and the risks involved in purchasing the Purchaser's Interest in the Loan. Plaintiffs also acknowledged that they have made an analysis and investigation of the Borrowers' financial condition and creditworthiness to the extent they deemed necessary.

In executing the Participation Agreements, the parties also carefully defined Pioneer's disclosure and notification obligations. Thus, Pioneer acknowledged that it has provided plaintiffs with true and complete copies of all Loan Documents, together with all other documents which are material to the Loan (collectively the Documents), including credit information in Pioneer's possession. Pioneer further represented and warranted to plaintiffs that it has no knowledge of any fact not apparent on the face of any Document which would materially and adversely affect the Loan. Pioneer also agreed to immediately notify plaintiffs should it learn or have actual knowledge of any change in the financial condition which may have a material adverse effect upon the continuation of payments under the Loan, or the Loan's ultimate collectability. And except as set forth in the Participation Agreements, Pioneer made no warranty or representation, express or implied, to plaintiffs.

Thus, examination of the Participation Agreements shows that plaintiffs' purchases of participation interests in the Revolving LOCs were arm's length transactions between sophisticated financial institutions in which plaintiffs acknowledged and agreed that they had conducted an independent analysis and investigation of the creditworthiness of the Borrowers and the attendant risks, and Pioneer made no representations or warranties to plaintiffs other than those expressly set forth in the agreements.

. . .

Plaintiffs' allegation of a special relationship with Pioneer fares no better. A special relationship requires a closer degree of trust than an ordinary business relationship and does not arise merely from an arm's-length business transaction.

Consequently, no special relationship typically exists between sophisticated financial institutions that negotiate agreements in arm's length transactions.

The Court therefore rejects plaintiffs' argument that Pioneer's superior knowledge of business operations of Mann and the Borrowers, its longstanding lending and depository relationship with them, the Blessing/Mann personal relationship and/or Pioneer's role in acting as a liaison to Mann and the Borrowers gave rise to a special relationship of trust and confidence. The parties are sophisticated financial institutions that entered into comprehensive written agreements negotiated by counsel, and those agreements directly refute plaintiffs' allegations of a fiduciary, confidential or special relationship, except as to Pioneer's limited role as a loan servicer and administrator.

In so concluding, the Court rejects plaintiffs' effort to dismiss Banque Arabe as a pre-Kimmell decision that must be confined to its particular facts and circumstances. Perhaps the Second Circuit went too far in stating that there is no fiduciary or special relationship between parties to a loan participation agreement unless expressly and unequivocally created by contract, but sophisticated banking institutions certainly have the freedom under New York law to disclaim contractually the existence of a fiduciary, confidential or special relationship, which is exactly what happened in Banque Arabe.

The Appellate Divisions have relied on the foregoing principles in concluding that allegations of a fiduciary, confidential or special relationship were conclusively defeated by the terms of the parties' written agreements. In ABL Advisor, for example, the First Department held that plaintiffs' allegation of a fiduciary relationship is directly refuted by the Participation Agreements, which were arm's length business transactions that did not create any fiduciary duty. To similar effect is the Second Department's recent decision in Hawthorne Funding, which held that plaintiff's allegation of a fiduciary relationship between it and the defendant is directly refuted by the parties' agreement, which was an arm's length business transaction between sophisticated business people and which did not create any fiduciary duty.

Whether a duty exists presents a question of law to be determined by the court based upon the facts and circumstances of each case. Even assuming the truth of plaintiffs' factual allegations regarding Pioneer's relationship with Mann and his companies, the Blessing/Mann relationship and Pioneer's role in acting as a liaison to Mann as the originating lender, the Court concludes that plaintiffs' allegations of a fiduciary, confidential or special relationship with Pioneer are utterly refuted by the terms of the Participation Agreements to which they assented.

Accordingly, the claims for negligent misrepresentation must be dismissed.

(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 negligent misrepresentation claim can only stand where there is a fiduciary or other special relationship between the plaintiff and defendant. Contact our attorneys at if you or a client think you have been defrauded, or if someone has accused you or a client of defrauding them.