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Most Business Fraud Claims Fail Under NY Law. Here's Why


Blog Category:
2/7/2016
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Image: Sira Anamwong/FreeDigitalPhotos.net

A decision from a New York County trial judge that appeared in the New York Law Journal set forth a very important - and common - reason that so many business fraud claims are dismissed:

Because these claims were already waived by contract.

Before getting to the "meat" of the New York trial court's decision in MBIA Insurance Corp. v. Merrill Lynch, some perspective is in order:

When is the last time anyone saw two more unlikeable parties on the opposite ends of a lawsuit?

On the one hand, you have an insurance company,  and on the other, a bank that stands accused of issuing misleading information that led to losses in the billions of dollars?

Anyway, I digress.

Why the Court Rejected the Plaintiff's Business Fraud Claims

While the facts of this particular case are not surprising, or unfortunately, unique, the court's decision is useful as a reminder why many business fraud claims fail under New York law.

In rejecting the plaintiff insurer's business fraud claims that were centered on their contention that they were not required to do their own forensic analysis - or actively guard itself against a fraud by the defendant - before entering into an agreement with the defendant, the court stated as follows:

"In Citibank, N.A. v. Plapinger, 66 N.Y.2d 90 (1985), the Court of Appeals set down the now-familiar doctrine that a specific (rather than general) disclaimer in a guarantee bars the guarantor's claim for fraud in the inducement, where the guarantor specifically disclaimed reliance on the very information which it now claims caused it to be misled. The Court in Plapinger further held that a clause declaring the agreement absolute and unconditional, and containing a waiver of affirmative defenses, 'reinforces' the specificity of the disclaimer."

What Happened on Appeal

Not surprisingly, the Appellate court didn't budge on this issue either, stating:

"Plaintiffs' fraud-related claims failed to state a cause of action in light of the specific disclaimers in the contracts, executed following negotiations between the parties, all sophisticated business entities, providing that plaintiff Lacrosse would not rely on defendants' advice, that it had the capacity to evaluate the transactions, and that it understood and accepted the risks (see Capital Z Fin. Servs. Fund II, L.P. v Health Net, Inc., 43 AD3d 100, 111 [2007]; UST Private Equity Invs. Fund v Salomon Smith Barney, 288 AD2d 87 [2001]).

"Given their level of sophistication and the undisputed fact that the information was not exclusively in defendants' possession, plaintiffs' contention that it would have been impractical to conduct the investigation necessary to discern the truth of defendants' allegedly fraudulent representations does not satisfy the requirements of the peculiar knowledge exception (see Steinhardt Group v Citicorp, 272 AD2d 255, 257 [2000])."

The Upshot

In other words, the court held that if you sign an agreement that essentially says in bold print: you're a big boy, and you have to do your own investigation and research before you choose to buy, then you had better be prepared to live with the consequences of the decision not to perform your own due diligence.



Category: Business Litigation


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