Aug 21st, 2014

Andrew R. Jones obtains dismissal of a fraud and a negligent misrepresentation complaint alleging over $10M in damages against prominent attorney.

FKB’s client is a solo practitioner with significant experience in real estate transactions and environmental litigation. The matter arose from the defendant-attorney’s representation of a limited liability partnership (the “LLP”) in obtaining zoning approval to convert a commercial property into a residential property for purposes of creating a condominium complex.

During the course of the defendant-attorney’s representation, the LLP obtained a loan in excess of $6M from the plaintiff (a sophisticated lender) for purpose of further financing the property conversion, which was contingent upon the LLP obtaining zoning approval. Three properties that were going to be converted into the condominium complex were used as collateral for the loan. While the LLP was predominately involved in procuring the loan, the defendant-attorney provided certain documents that confirmed the LLP’s representation that the value of the three properties was in excess of $6M. After the plaintiff issued the loan, the LLP defaulted on the loan and declared bankruptcy. The plaintiff-lender thereafter learned that the value of the properties was purportedly significantly less than $6M.

Unable to effectively foreclose on the properties, the plaintiff commenced an action against the attorney-defendant in the New York County, Supreme Court (Commercial Division), for fraud. The plaintiff thereafter moved to amend its pleadings to add a cause of action for negligent misrepresentation. The plaintiff alleged that the defendant-attorney misrepresented the value of the properties for purposes of inducing the plaintiff to issue a loan in excess of the actual value and that “but for” this misrepresentation, the plaintiff would have issued a smaller loan.

In response to the complaint, FKB file a motion to dismiss pursuant to CPLR §3211(a)(7) seeking dismissal of the complaint on the grounds that the plaintiff failed to plead a cause of action for fraud/negligent misrepresentation. FKB argued that plaintiff was a sophisticated lender who had the means available to conduct its own due diligence to ascertain the value of the properties prior to issuing the loan and that its failure to conduct the same cannot be attributed to the defendant-attorney. Thus, we argued that the plaintiff failed to plead it reasonably relied on any representations made by the defendant-attorney regarding the value of the properties.

Following oral argument, in a Decision and Order dated August 6, 2014, Justice Peter O. Sherwood agreed with the legal arguments set forth in FKB’s motion to dismiss and granted the motion in its entirety. Justice Sherwood held that the plaintiff failed to adequately contest that it had the means available, and yet failed, to conduct it its own diligence. Thus, Justice Sherwood found that the plaintiff “willing assumed the risk” in issuing the subject loan and that plaintiff’s claims for fraud and negligent misrepresentation were insufficiently pled.

If you have any questions about this decision, or the defense of attorneys in general, please contact Andrew R. Jones.