Fraud Claim Fails When Sophisticated investor Fails to Conduct Due Diligence

On November 20, 2014, the First Department issued a decision in MMCT, LLC v. JTR College Point, LLC, 2014 NY Slip Op. 08103, affirming the dismissal of a fraud claim.

In MMCT, the plaintiff brought suit based on three allegedly false pre-investment statements made to one of its members.

The first was that phases one and two of the construction project, and the environmental studies for the project, were already under way. Plaintiff alleges conclusorily that this statement was false but fails to allege any facts that would support an inference that the statement was false at the time it was made. Moreover, plaintiff cannot establish justifiable reliance on Halpern's statement, since neither the complaint nor Gallin's affidavit makes mention of whether plaintiff's representatives or its members, who are sophisticated investors, inspected the project site or bookkeeping to ascertain the status of the project before investing in it.

The second alleged misrepresentation was that the project was in a "great area" and that Halpern would prefer to invest his own money rather than rely on his family. This statement is non-actionable opinion or puffery.

The third alleged misrepresentation was made in a "Confidential Information Memorandum" (CIM) which outlined the goals and structure of the project. Plaintiff alleges the CIM contains material misrepresentations of fact that were made with the knowledge that they were false when made. Among those misrepresentations are that the investment was a loan and that plaintiff was certain to recover its investment with a profit. The CIM states, however, that its sole purpose is to provide "general information" about the development project and that "nothing contained in this memorandum is or shall be relied upon as a promise or representation as to the past or future performance of the Property. The CIM also contains a disclaimer that "any estimates and projections have been prepared by, and based upon information that involves significant subjective judgments, assumptions and analyses of management, outside consultants and third parties which may or may not be accurate; Although plaintiff contends its investment was functionally a loan, the CIM provides that it is a preferred investment interest secured by a preferred equity interest combined with a 5% share of the project net profit, indicating that this was a performance based investment.

Plaintiff has not satisfied the heightened pleading standard for a fraud claim under CPLR § 3016(b) because it failed to identify any of the allegedly, false representations that Halpern made with the then present intent to induce plaintiff's investment in the project.

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