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Whether Plaintiff “Justifiably Relied” on Alleged Misrepresentations Is Not Generally a Question Which Can Be Resolved in a Motion to Dismiss for Failure to State a Cause of Action

Reversing the appellate division, over two-judge dissent, the Court of Appeals determined (in the context of a motion to dismiss for failure to state a cause of action) plaintiff had sufficiently pled “justifiable reliance” on the representations at issue. The complaint alleged defendant (Goldman Sachs) “fraudulently induced plaintiff to provide financial guaranty for a synthetic collateralized debt obligation (CDO), known as ABACUS. In its complaint, plaintiff alleges that defendant fraudulently concealed the fact that its hedge fund client …, which selected most of the portfolio investment securities in ABACUS, planned to take a “short” position in ABACUS, thereby intentionally exposing plaintiff to substantial liability; had plaintiff known this information, it would not have agreed to the guaranty.” The complaint further alleged defendant affirmatively misrepresented the role of the hedge fund in answer to plaintiff's questions. Those allegations were sufficient to survive a motion to dismiss:

To plead a claim for fraud in the inducement or fraudulent concealment, plaintiff must allege facts to support the claim that it justifiably relied on the alleged misrepresentations. It is well established that “if the facts represented are not matters peculiarly within the [defendant's] knowledge, and [the plaintiff] has the means available to [it] of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, [the plaintiff] must make use of those means, or [it] will not be heard to complain that [it] was induced to enter into the transaction by misrepresentations” … . Moreover, “[w]hen the party to whom a misrepresentation is made has hints of its falsity, a heightened degree of diligence is required of it. It cannot reasonably rely on such representations without making additional inquiry to determine their accuracy” … . Nevertheless, the question of what constitutes reasonable reliance is not generally a question to be resolved as a matter of law on a motion to dismiss … .  ACA Fin. Guar. Corp. v Goldman, Sachs & Co., 2015 NY Slip Op 03876, CtApp 5-7-15

 

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