Courts Continue to Wrestle with Standard for Reasonable Reliance in Commercial Contexts

On October 31, 2013, Justice Ramos of the New York County Commercial Division issued a decision in Moshe v. Charles Rutenberg LLC, 2013 NY Slip Op. 51813(U), denying the defendant's summary judgment motion for dismissal of a fraudulent inducement cross-claim. The cross-claim defendant had argued that the reasonable reliance element of the fraud cross-claim had not been established as a matter of law because the cross-claimants were sophisticated parties who had failed to make use of the means of verification that were available to them. Justice Ramos denied summary judgment after finding that material questions of fact existed about whether the cross-claimants had failed to make use of the means of verification that were available to them.

This case is one of many cases that are currently being litigated in New York County and the First Department where courts are grappling with the issue of whether claims sounding in fraud can be dismissed on the pleadings or at the close of discovery based on the plaintiff's failure to plead or raise a triable issue of fact with respect to his justifiable reliance on the defendant's allege misrepresentations. The seminal case dealing with this issue is the Court of Appeals' decision in DDJ Mgmt., LLC v. Rhone Group, 15 N.Y.3d 147, 2010 NY Slip Op 05603, where the court opined, despite reversing the First Department's dismissal on the pleadings of plaintiff's fraud claim for failing sufficiently to plead justifiable reliance, that it was still possible for New York courts to dismiss fraud claims on the pleadings for failure to plead justifiable reliance where the parties are sophisticated parties in an arm's-length transaction. The court cautioned, however, that the "question of what constitutes reasonable reliance is always nettlesome because it is so fact intensive." (internal quotation marks omitted).

Since DDJ Mgmt. was decided, the New York County Commercial Division Justices have usually denied motions to dismiss and for summary judgment in fraud cases, rejecting arguments from defendants that justifiable reliance was not sufficiently pled or that material issues of fact did not exist with respect to justifiable reliance, and the First Department usually reversed these decisions. See, e.g., HSH Nordbank AG v. UBS AG, 95 A.D.3d 185, 2012 NY Slip Op 02276 (Mar. 27, 2012); Sony Ericsson Mobile Communications USA, Inc. v. LSI Corp., 102 A.D.3d 565, 2013 NY Slip Op 00399 (Jan. 24, 2013); ACA Fin. Guaranty Corp. v. Goldman, Sachs & Co., 106 A.D.3d 494, 2013 NY Slip Op 03429 (May 14, 2013) (Friedman, J.P. and Renwick and Roman, JJ. reversing order denying motion to dismiss with Clark and Manzanet-Daniels, JJ. dissenting).

Notwithstanding the First Department's decisions, the New York County Commercial Division Justices—as Justice Ramos did in Moshe—continue to deny these motions. See, e.g., MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 2013 NY Slip Op 50677(U) (Apr. 29, 2013) (Bransten, J.); AMBAC Assur. Corp. v. EMC Mortgage LLC, 2013 NY Slip Op 50954(U) (June 13, 2013) (Ramos, J.); Basis Pac-Rim Opportunity Fund (Master) v. TCW Asset Mgmt. Co., 2013 NY Slip Op 51494(U) (Sept. 10, 2013) (Kornreich, J.); Wyle Inc. v. ITT Corp., 2013 NY Slip Op 51707(U) (Oct. 21, 2013) (Ramos, J.). None of the First Department decisions have yet reached the Court of Appeals. Leave to appeal was not sought in HSH Nordbank AG, the Court of Appeals denied leave to appeal in Sony Ericsson (2013 NY Slip Op 69151 (Apr. 2, 2013)), and just last month the Court of Appeals sua sponte dismissed the appeal filed from the 3-2 decision in ACA for lack of finality (NY Slip Op 88246 (Oct. 15, 2013)). And appeals from the more recently-decided Commercial Division decisions have not yet been perfected. The MBIA case settled shortly after the notice of appeal was filed, the defendants did not appeal the denial of their motion to dismiss in AMBAC, a notice of appeal was filed last month in Basis Pac-Rim but that appeal has not yet been perfected, and the time to file a notice of appeal in Wyle and Moshe has not yet expired.

Thus, the issue of justifiable reliance continues to be hotly contested between the Manhattan Commercial Division and the First Department, with no definitive Court of Appeals decision in sight.