Lack of Due Diligence Dooms Fraudulent Inducement Claim

On April 16, 2020, Justice Ostrager of the New York County Commercial Division issued a decision in Shilpa Saketh Realty Inc. v. Vidiyala, 2020 NY Slip Op. 30952(U), holding that a lack of due diligence doomed a fraudulent inducement claim, explaining:

Plaintiff’s second argument against the applicability of the Release is that the Release is invalid because defendants were fiduciaries of plaintiff and plaintiff had no reason to believe that any one of them was acting in their own interest, nor was it otherwise aware of any information that would make reliance on them unreasonable. Plaintiff relies on Pappas v. Tzolis, 20 N.Y.3d 228, 232, (2012), in which the Court of Appeals noted that a sophisticated principal is able to release its fiduciary from claims – at least where the fiduciary relationship is no longer one of unquestioning trust – so long as the principal understands that the fiduciary is acting in its own interest and the release is knowingly entered into; the test, in essence, is whether, given the nature of the parties’ relationship at the time of the release, the principal is aware of information about the fiduciary that would make reliance on the fiduciary unreasonable. Plaintiff argues that Tzois does not support a release where there was a relationship of trust. Plaintiff also attempts to distinguish the results in Tzois and Centro on the basis that the parties in those cases were more sophisticated than plaintiff is here.

However, even if defendants were fiduciaries of plaintiff and even if plaintiff was unsophisticated, plaintiff’s exclusive reliance on defendants is unreasonable, because defendants’ alleged representations are contradicted by the express terms of the Transaction Documents, which plaintiff admittedly did not read. Even assuming plaintiff was not as sophisticated as the parties in Tzois and Centro, plaintiff’s alleged reliance on defendants does not excuse plaintiff’s failure to read the Transaction Documents.

For example, plaintiff alleges that defendant Vidiyala failed to disclose to plaintiff that plaintiff was the only Stockholder to suffer a reduction in its pro rata share of the purchase price and that the reduction would be reallocated to the remaining Stockholders. However, the Allocated Share Schedule to the SPA clearly lays out the share allocation of each stockholder.

Plaintiff acknowledges that it was told its share allocation was being reduced by millions of dollars. Plaintiff knew that the sum allocated to InvaGen shareholders was being reduced by $100,000,000. As with all contracts, plaintiff had a duty to read the agreements. The alleged misrepresentations are contradicted by the plain terms of the Transaction Documents. Indeed, the Court notes that although the overall Transaction Documents may have been voluminous, the General Release is a separately executed document – which plaintiff separately signed – and is only five pages long. Plaintiff had duty to read what claims it was releasing.

A plaintiff may challenge a release on the grounds that the release was fraudulently induced. Here, plaintiff alleges fraudulent inducement with respect to all of the Transaction Documents, including but not limited to the General Release. However, because of the broad Release discussed above, the relevant question is whether plaintiff is bound by the Release.

The Court finds that plaintiff’s fraudulent inducement claim fails as a matter of law.

. . .

[U]nder Centro, a release may be invalidated if it was not fairly and knowingly made. Typically, a court may find unfairness where a plaintiff enters into a release without time to investigate or deliberate, does not have access to counsel, or is disproportionally unsophisticated. In this case, while plaintiff alleges relative lack of sophistication due to age, plaintiff’s owners and agent were either in pursuit of or had advanced degrees and were well aware that they were in engaged in a multi-hundred-million-dollar transaction. Most importantly, plaintiff does not allege any time pressure, coercion, or lack of access to counsel. Indeed, plaintiff does not allege that it even requested access to the full documents to read.

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

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements or rules, including the rule that a sophisticated 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.