A SOPHISTICATED PARTY’S REQUEST FOR AND RECEIPT OF WRITTEN ASSURANCES FROM DEFENDANT WAS A VALID SUBSTITUTE FOR A DUE DILIGENCE INQUIRY, SUPREME COURT’S DISMISSAL OF FRAUD ACTION REVERSED.

The First Department, reversing Supreme Court, determined the motion to dismiss the complaint alleging fraud should not have been granted, and the motion to amend the complaint to allege negligent misrepresentation should have been granted. Supreme Court ruled that plaintiff was a sophisticated lender and made the loan without performing due diligence (and therefore could not allege justifiable reliance on any misrepresentations). The First Department held that plaintiff’s request for and receipt of written assurances was sufficient due diligence:

A sophisticated party is generally required to exercise due diligence to verify the facts represented to it before entering into a business transaction … . The Court of Appeals has recognized, however, that, “where a plaintiff has gone to the trouble to insist on a written representation that certain facts are true, it will often be justified in accepting that representation rather than making its own inquiry” … . In this case, plaintiff alleges that it made the loan … in reliance on [defendant] Noto’s opinion letter, which was specifically addressed to plaintiff, in which Noto opined that the loan transaction would not put [any party] into breach of any preexisting contract or agreement … . Plaintiff alleges that this representation was false, inasmuch as the undisclosed 2005 letter agreement required [maintenance of] a $2 million cushion of “unencumbered equity” in the property in any refinancing, and — given that the true value of the property was only $1.9 million, based on the terms of the undisclosed 2005 transaction — plaintiff’s $6.6 million loan … wiped out any such equity in the property. Remediation Capital Funding LLC v Noto, 2017 NY Slip Op 01119, 1st Dept 2-10-17

CONTRACT LAW (A SOPHISTICATED PARTY’S REQUEST FOR AND RECEIPT OF WRITTEN ASSURANCES FROM DEFENDANT WAS A VALID SUBSTITUTE FOR A DUE DILIGENCE INQUIRY, SUPREME COURT’S DISMISSAL OF FRAUD ACTION REVERSED)/FRAUD (A SOPHISTICATED PARTY’S REQUEST FOR AND RECEIPT OF WRITTEN ASSURANCES FROM DEFENDANT WAS A VALID SUBSTITUTE FOR A DUE DILIGENCE INQUIRY, SUPREME COURT’S DISMISSAL OF FRAUD ACTION REVERSED)/MISREPRESENTATION (A SOPHISTICATED PARTY’S REQUEST FOR AND RECEIPT OF WRITTEN ASSURANCES FROM DEFENDANT WAS A VALID SUBSTITUTE FOR A DUE DILIGENCE INQUIRY, SUPREME COURT’S DISMISSAL OF FRAUD ACTION REVERSED).SOPHISTICATED PARTY (A SOPHISTICATED PARTY’S REQUEST FOR AND RECEIPT OF WRITTEN ASSURANCES FROM DEFENDANT WAS A VALID SUBSTITUTE FOR A DUE DILIGENCE INQUIRY, SUPREME COURT’S DISMISSAL OF FRAUD ACTION REVERSED)/DUE DILIGENCE (A SOPHISTICATED PARTY’S REQUEST FOR AND RECEIPT OF WRITTEN ASSURANCES FROM DEFENDANT WAS A VALID SUBSTITUTE FOR A DUE DILIGENCE INQUIRY, SUPREME COURT’S DISMISSAL OF FRAUD ACTION REVERSED)