Lack of Due Diligence and Awareness of Risks Irrelevant Where Claim is for Fraudulent Inducement

On January 5, 2022, Justice Masley of the New York County Commercial Division issued a decision in BRL Hampton Rd. LLC v. Heather, 2022 NY Slip Op 30039(U), granting plaintiff summary judgment where defendant defaulted on a Construction Loan even though plaintiff failed to conduct due diligence, was aware of the risks with a startup and was the one who had the idea to lend $1 million to defendant to get the construction project moving. The Court explained:

For fraudulent inducement, "there must be a knowing misrepresentation of material present fact, which is intended to deceive another party and induce that party to act on it, resulting in injury." (Gosmile, Inc. v Levine, 81 AD3d 77, 81, 915 N.Y.S.2d 521 [1st Dept 2010] [citations omitted].)

Bruce Lewin, the sole member of plaintiff, states that he relied on Heather's representations, and that plaintiff would have never entered into the Transaction if Heather had not previously represented to Lewin that he had secured a $500,000 cash investment from Frank Devito, the contractor, as was necessary to fund the initial rent escrow deposit of $427,885.16. (NYSCEF 121, Lewin aff ¶ 3.) Lewin denies that Heather disclosed to him, prior to the Transaction closing, that the Corporate Defendants had not, in fact, received Devito's $500,000 cash investment as Heather had expected. (Id. ¶ 4.) Months after entering into the Transaction, Lewin learned that the money that funded the $427,885.16 initial rent escrow deposit actually [*4] came from the Construction Loan that plaintiff provided to the Corporate Defendants. (Id. ¶ 5.) In other words, Heather used plaintiff's Construction Loan proceeds to pay the initial rent escrow deposit due under the Lease.

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Heather counters that there are disputed facts that preclude summary judgment. He insists that, as an experienced and successful investor, Lewin understood 2022 N.Y. Misc. LEXIS 54, *2; 2022 NY Slip Op 30039(U), **2 the importance of due diligence and the risks of startups. (NYSCEF 124, Heather aff ¶¶ 1-4.) Indeed, Heather observes that it was Lewin's idea to provide the $1 million [*5] Construction Loan, in addition to purchasing the Premises, to get the project moving. (Id. ¶ 9.) Heather opines that in pursing this case, plaintiff is motivated by personal animosity. (Id. ¶12.) Finally, Heather complains that he has not been compensated as founder and executive of the project and instead remortgaged his home to keep the project alive. (Id. ¶16.)

Heather's objections are not relevant to the claim before the court. Implicit in Heather's objection to Lewin's failure to conduct due diligence is the idea that plaintiff would have discovered Heather's scheme. Alternatively, Heather asserts that plaintiff knew in September 2018 that Devito had not provided the funds he promised to invest which completely contradicts his first argument, but the critical date is May 18, 2018, the [**5] date of the closing. (Id. ¶¶ 10-11.) Moreover, neither the operation of a startup, nor the false hope that money might one day arrive to cover the money Heather took from plaintiffs Construction Loan, legally excuse Heather from having made knowing misrepresentations to plaintiff.

The attorneys at Schlam Stone & Dolan frequently litigate claims both in law and equity relating to performance under a contract. Contact our attorneys at commercialdivisionblog@schlamstone.com if you or a client have questions regarding breach of contract, fraudulent inducement and unjust enrichment.