Commercial Division Blog

Posted: April 21, 2023 / Written by: Jeffrey M. Eilender, Samuel L. Butt, Seth D. Allen, Joshua Wurtzel, Channing J. Turner / Categories Commercial, Fraud/Misrepresentation

Projections and Estimates Contained in Investment Memorandum Not Basis for Claim of Fraud or Misrepresentation

In a Decision and Order, dated March 13, 2023, in Cimen v. HQ Capital Real Estate L.P., Index No. 656205/2020, Justice Joel M. Cohen of the New York County Commercial Division dismissed plaintiffs’ amended complaint asserting, among other things, fraud and negligent misrepresentation based on projections and estimates in an investment memorandum because plaintiffs failed to adequately allege that the projections were based on actionable factual misrepresentations or that they did not reflect defendants’ views with the requisite particularity. The Court explained: 

To state a viable claim of fraud, a party must allege "material misrepresentation of a fact, [*2] knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff, and damages" (Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 NY3d 553, 559, 910 N.E.2d 976, 883 N.Y.S.2d 147 [2009] [internal citation omitted]). Under CPLR 3016 (b), claims based on alleged instances of fraud or misrepresentation must be pled with particularized facts, though that requirement "should not be confused with unassailable proof of fraud" (Pludeman v. Northern Leasing Systems, Inc., 10NY3d 486, 492, 890 N.E.2d 184, 860 N.Y.S.2d 422 [2008]). Similarly, "the tort of negligent misrepresentation involves most of the same elements as fraud, with a negligence standard substituted for the scienter requirement" [**3] (M&T Bank Corp. v. Gemstone CDO VII, Ltd., 23 Misc.3d 1105[A], at *14, 881 N.Y.S.2d 364, 2009 NY Slip Op 50590[U] [Sup. Ct. Erie Cnty., April 7, 2009] [internal citations omitted], aff'd as mod, 68 AD3d 1747, 891 N.Y.S.2d 578 [4th Dept 2009]).

Plaintiffs' principal allegations of fraud and misrepresentation in the Amended Complaint concern alleged projections and estimates contained in Defendants' Investment Memorandum with respect to (i) renovation rates of apartments in the properties; (ii) market rental rates of three-bedroom apartments in the vicinity; and (iii) the projected annual vacancy losses (see NYSCEF 37 at 11). However, Plaintiffs fail to adequately allege that these projections were based on actionable factual misrepresentations, or that they did not reflect the views of Defendants, with the requisite particularity to sustain a claim for fraud or misrepresentation. [*3]

Turning first to Plaintiffs' claims based on the projected renovation rates, Plaintiffs allege Defendants' Investment Memorandum "falsely stated that an annual turnover rate of 23 apartments per year was in line with the 'portfolio's historical natural turnover rate'" (NYSCEF 26 ¶ 140). This allegation is based on the fact that "a maximum of only 65 apartments would be available from 2015 through 2018 to effectuate the contemplated" renovations (id. ¶ 147). This was due, in part, to certain apartments being subject to the Home Written Agreement (id. ¶ 146). As Plaintiffs point out, "the Investment Memorandum thus projected that 92% of the available apartments would be vacated and renovated during such period" and, therefore, Plaintiffs allege Defendants "had no reasonable reason to believe that such number would be vacated and renovated" (id. ¶¶ 149-150).

However, the Investment Memorandum disclosed that the 52 apartment units subject to the HOME Written Agreement would not be "candidates for the upgrade strategies" until the program's expiration in 2018 (NYSCEF 33 at 3). Plaintiffs have not adequately or specifically alleged why Defendants' projections, with that disclosure, constituted [*4] a misstatement of present [**4] fact or lacked a reasonable basis. The challenged statements are "not actionable because such projections are merely statements of prediction or expectation" (ESBE Holdings, Inc. v Vanquish Acquisition Partners, LLC, 50 AD3d 397, 398, 858 N.Y.S.2d 94 [1st Dept 2008] [internal citation omitted]).

Similarly, the only support for Plaintiffs' allegations based on the vacancy loss projections is the fact that the actual vacancy losses were higher than those projected (see NYSCEF 37 at 14). This, too, is insufficient to sustain their claims as neither the Amended Complaint nor Plaintiffs' opposition contain allegations that Defendants knowingly made factual misstatements at the time they were made (cf. CPC Int'l Inc. v McKesson Corp., 70 NY2d 268, 274, 286, 514 N.E.2d 116, 519 N.Y.S.2d 804 [1987] [finding financial projections were sufficient to form the basis for common-law fraud where the plaintiff alleged defendant knowingly "created fictitious projections ...which they knew were at odds with the unfavorable projections...prepared...two weeks earlier"]).

Finally, Plaintiffs argue in their opposition that the Investment Memorandum falsely represented the market rental rates for three-bedroom apartments (NYSCEF 37 at 12). This allegation is "not based on any alleged arithmetical error but on the fact that the Investment Memorandum utilized apartments which were [*5] not representative of the true state of the market" (id.). Plaintiffs' only support of this allegation is in the form of an attorney affirmation stating the data underpinning Plaintiffs' alleged market rates in the Amended Complaint was provided by CoStar Group Inc. (NYSCEF 38). Even accepting this assertion (not based on personal knowledge), Plaintiffs' allegations amount to a disagreement with Defendants' business judgment and are insufficient to sustain a claim based on fraud or misrepresentation (see e.g., Olkey v Hyperion 1999 Term Tr. Inc., 98 F3d 2, 7-8 [2d Cir. 1996] [rejecting fraud claims based on allegations that the defendants made wrong assumptions about interest rates holding that plaintiffs' claim that the "balancing was not as skillfully done as it should have been" or "that [**5] another set of investment choices should have been made" constitute unactionable hindsight speculation]).

Additionally, Plaintiffs fail to adequately allege scienter. Plaintiffs' sole allegation that Defendants knew the representations were false, or were made recklessly, is "upon information and belief' (NYSCEF ¶ 157). "While information peculiarly within the opposing party's knowledge may be pleaded generally, or upon information and belief, the allegations [*6] must be accompanied by a statement of the facts upon which the belief is based" (Bd. of Managers of Beacon Tower Condominium v 85 Adams St., LLC, 136 AD3d 680, 686, 25 N.Y.S.3d 233 [2d Dept 2016] [internal citations omitted]). Stated differently, claims "made upon information and belief [are] not sufficient to establish the necessary quantum of proof to sustain allegations of fraud" (Weinberg v Kaminsky, 166 AD3d 428, 429, 88 N.Y.S.3d 16 [1st Dept 2018] [internal citation omitted]; see also Facebook, Inc. v DLA Piper LLP (US), 134 AD3d 610, 615, 23 N.Y.S.3d 173 [1st Dept 2015] ["Allegations regarding an act of deceit or intent to deceive must be stated with particularity" and "the claim will be dismissed if the allegations as to scienter are conclusory and factually insufficient"] [internal citations omitted], lv denied 28 N.Y.3d 903, 40 N.Y.S.3d 351, 63 N.E.3d 71 [2016]). Here, Plaintiffs fail to support their allegations with any "statement of facts upon which [their] belief is based" (Bd. of Managers, 136 AD3d at 686).

The attorneys at Schlam Stone & Dolan frequently litigate claims for fraud and misrepresentation. Contact our attorneys at if you or a client have questions regarding such issues.