Fraud Claim Dismissed for Failure to Exercise Due Diligence

On July 25, 2014, Justice Scarpulla of the New York County Commercial Division issued a decision in Northern Group Inc. v. Merrill, Pierce, Fenner & Smith, 2014 NY Slip Op. 31986(U), dismissing a fraud claim because of, among other reasons, the plaintiff's failure to exercise due diligence.

In Northern Group, the defendant moved for summary judgment on the plaintiff's fraud claim relating to the sale of commercial mortgage-backed securities. The court granted the motion for several reasons, including the plaintiff's failure to exercise due diligence, explaining:

Plaintiffs' assertion that Boris' knowledge was inadequate, and the attempt to portray [the plaintiff] as victimizing a naive elderly woman and her son, are unavailing. The record establishes that the corporate shareholders and officers were sophisticated real estate operators who controlled properties worth hundreds of millions of dollars. That being the case, they were not entitled to blindly accept [the defendant's]generalities about CMBS safety. 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. New York law imposes an affirmative duty on sophisticated investors to protect themselves from misrepresentations by investigating the details of the transactions. If plaintiffs' understanding of commercial mortgage securitization was imperfect, they could have retained qualified financial experts to evaluate their anticipated investments.

(Internal quotations and citations omitted) (emphasis added).