Kimmell v. Schaefer, 89 N.Y.2d 257 (1996)
In a commercial context, a duty to speak with care and avoid negligent misrepresentation arises when a special relationship exists between the parties, justifying reliance on the speaker’s words due to unique expertise, a relationship of trust, or knowledge of the information’s intended use.
Summary
Plaintiffs sued Defendant, CESI’s CFO, for negligent misrepresentation regarding an investment in a failing co-generation project. Defendant solicited Plaintiffs’ investment, providing overly optimistic projections despite an impending utility rate change that would render the project unprofitable. The New York Court of Appeals held that Defendant owed Plaintiffs a duty of care because his position at CESI, combined with his direct solicitation of Plaintiffs’ investment, created a special relationship that justified their reliance on his representations. This case clarifies the standard for establishing a duty of care in negligent misrepresentation claims in commercial settings.
Facts
Defendant, the CFO and chairman of CESI, sought investors for a co-generation project. He recruited Plaintiffs through his accountant, providing them with financial projections that were based on outdated utility rates. Defendant met with Plaintiffs, personally vouching for the investment’s soundness and encouraging them to rely on the projections. Critically, a new utility rate, effective January 1, 1988, eliminated the project’s profitability, a fact not reflected in the projections provided to Plaintiffs. Plaintiffs invested $320,000 each in the project, relying on Defendant’s representations and the projections. The project failed, and CESI went bankrupt.
Procedural History
Plaintiffs sued Defendant for damages arising from their failed investment. The Supreme Court found Defendant liable for negligent misrepresentation, holding that a special relationship existed between Defendant and Plaintiffs. The Appellate Division affirmed. The New York Court of Appeals granted Defendant leave to appeal.
Issue(s)
Whether Defendant, as CFO and chairman of CESI, owed a duty of care to Plaintiffs, thereby making him liable for negligent misrepresentation regarding the investment’s potential.
Holding
Yes, because Defendant’s unique position within CESI, his active solicitation of Plaintiffs’ investment, and his knowledge of their reliance on his representations created a special relationship sufficient to establish a duty of care.
Court’s Reasoning
The Court of Appeals stated that liability for negligent misrepresentation requires a duty between the tortfeasor and the injured party. In commercial contexts, this duty arises when “the relationship of the parties, arising out of contract or otherwise, [is] such that in morals and good conscience the one has the right to rely upon the other for information.” (quoting International Prods. Co. v Erie R. R. Co., 244 NY 331, 338). The Court emphasized that not all representations create such a duty, but it can be imposed on those with “unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified.” The Court noted that Defendant, as CESI’s CFO and chairman, had unique access to information about the project’s viability. He actively solicited Plaintiffs’ investment and encouraged their reliance on the projections. He even provided updated projections that failed to account for the recent change in utility rates. The court stated, “Defendant further urged plaintiffs to review and rely on the projections. Indeed, defendant informed Kimmell that he could provide ‘hot comfort’ should plaintiff entertain any reservations about investing.” These actions, the Court reasoned, established a special relationship creating a duty of care. The Court also rejected the defendant’s argument that he was protected by Business Corporation Law §§ 715 and 717, because he failed to adequately assess the competence of the employees who prepared the projections, especially given the widespread publicity surrounding the utility rate changes. Ultimately, the court affirmed the lower court’s ruling because the record supported the existence of a special relationship which under the circumstances here required defendant to speak with care.