New York’s High Court Makes It Easier to Prove Business Fraud Claim August 30, 2010

They may have been naive, but they’re entitled to a shot at vindication before a jury, held New York’s Court of Appeals in DDJ Management LLC v. Rhone Group, LLC.

In this case, the plaintiffs sued to recover their losses after learning that the $4o million loans they extended to the defendants turned out to be based on some seriously cooked books. The defendants raised an interesting defense, which can be summarized as follows: “our books were so bad that you had no right relying on them to lend us the money.”

As noted in “Why Fraudulent Concealment Claims Are So Tough to Win,” one of the essential elements that a plaintiff must prove in order to establish a fraud claim under New York law is that she reasonably relied to her detriment upon the defendant’s representations. Applying this rule, many New York courts have dismissed fraud claims where the plaintiff’s purported reliance on the defendants’ representations was clearly unjustified, such as in Global Mins. & Metals Corp. v Holme (35 AD3d 93 [1st Dept 2006]), where the plaintiff fired an officer whom it found to be untrustworthy, and then inexplicably trusted that same officer’s verbal assurances that a transaction was completely innocent.

Importantly, New York’s High Court carved out a clear exception, and stated that one way to prove a fraudulent concealment claim under New York law is as follows:

“Where, however, a plaintiff has taken reasonable steps to protect itself against deception, it should not be denied recovery merely because hindsight suggests that it might have been possible to detect the fraud when it occurred. In particular, 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.”

Jonathan Cooper is a New York Business Litigation and New York Commercial Litigation Lawyer with a focus on New York breach of contract and New York business fraud claims before the Nassau, Queens, Brooklyn, Bronx, Westchester and Suffolk County courts of New York State. For more information, feel free to contact his Long Island office at 516-791-5700.

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