Lender Has No Obligation to Perform Due Diligence to Determine if Signature on Loan Documents Was Fraudulent

On February 9, 2022, Justice Borrock of the New York County Commercial Division issued a decision in Donald Jaffe Inc. v. REEC 137 Franklin St. LLC, 2022 NYLJ LEXIS 85, holding that even where a notarized signature on loan documents was proven to be fraudulent, the lender had no obligation to perform due diligence to discover the fraud where the documents were facially valid and notarized, stating:

The Plaintiffs, as lender, had no obligation to perform due diligence so as to protect Brandon from the possibility that his father, Michael, and his assistant, Ms. Frangipane, were forging his name to certain loan documents and notarizing his signature (EBC I, Inc. v. Goldman Sachs & Co., 91 AD3d 211, 214 [1st Dept 2011] [noting no fiduciary duty in arm's length negotiations]) and could rely on the facially valid documents, which were notarized (In re Estate of Goodman, 2 AD2d 558, 560 [1st Dept 1956]) and confirmed as validly executed by opinions of Defendants' counsel (NYSCEF Doc. No. 76). Additionally, discovery may reveal that either Michael had permission to act for Brandon to cause his signature to be affixed to the documents at issue or otherwise directed Ms. Frangipane to do it. If this were to be the case, Brandon as principal to his father's actions or Ms. Frangipane cannot now disavow his liability based on his father, as his agent's, actions (Chubb & Son v. Consoli, 283 AD2d 297, 298 [1st Dept 2001]). It is more than a little bit curious that Ms. Frangipane remains in Brandon's employ.

The attorneys at Schlam Stone & Dolan frequently litigate issues related to fraud and the enforcement of contractual obligations. Contact our attorneys at commercialdivisionblog@schlamstone.com if you or a client have questions regarding the enforceability of contracts that may be fraudulent.

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