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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: August 31, 2018

Fraud Claim Dismissed for Lack of Reasonable Reliance

On August 15, 2018, Justice Sherwood of the New York County Commercial Division issued a decision inĀ Solomon Capital, LLC v. Lion Biotechnologies, Inc., 2018 NY Slip Op. 31977(U), dismissing a fraud claim for lack of reasonable reliance, explaining:

With respect to the first and second alleged misrepresentations, that Sharbat had formerly run a U.S. public company, and had previously raised hundreds of millions of dollars for biotech companies, defendant fails to plead facts to show justifiable reliance. As a matter of law, 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. The plaintiff must establish that it employed its intelligence and engaged in due diligence, and sophisticated business people have a heightened duty to use all means available to verify the information, and use their sophistication to conduct due diligence.

Lion is a sophisticated business entity. It fails to allege facts to show due diligence in ascertaining the truth of the alleged misrepresentations. It would not be particularly difficult to investigate whether Sharbat had actually run a public company, or whether he had raised investment monies for other biotech firms. Contrary to its contentions, there was no fiduciary relationship, as discussed below, to outweigh defendant’s due diligence obligations. Plaintiffs had no special duty to disclose pursuant to the special facts doctrine, since the information was not peculiarly within plaintiffs’ knowledge, and was not such that the information could not have been discovered by defendant through the exercise of ordinary diligence.

Similarly, with regard to Sharbat’s failure to disclose the investigation and proceedings before FINRA (as the basis for the second counterclaim for fraudulent concealment), or any lawsuits involving Sharbat or Solomon Capital, not only has defendant failed to plead a basis for a duty to disclose, as discussed below in connection with the breach of fiduciary duty counterclaim, it fails to allege any facts to show it used its sophistication to determine the truth of Sharbat’s assertions, which are a matter of public record. Further, both the FINRA complaint, in July 2012, and the FINRA default order, in November 2012, had not yet occurred when the parties entered into their agreement in June 2012. Defendant does not allege that it made any inquiry regarding Sharbat’s experience finding investors for public companies. Moreover, it admits that it did not conduct a litigation search of plaintiffs, or review public records.

(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 sophsticated businessperson’s reliance on a false statement must be reasonable. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client think you have been defrauded, or if someone has accused you or a client of defrauding them.

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