Sykes v. RFD Third Avenue 1 Associates, LLC, 17 N.Y.3d 36 (2011)

A claim for negligent misrepresentation requires the plaintiff to demonstrate that the defendant knew the specific party or parties would rely on the misrepresentation; general knowledge that a class of people might rely is insufficient.

Summary

Plaintiffs, apartment purchasers, sued Cosentini Associates, the engineering firm that designed the building’s HVAC system, for negligent misrepresentation based on statements in the offering plan. The New York Court of Appeals held that the plaintiffs’ claim failed because they did not adequately allege that Cosentini knew that they, as specific individuals, would rely on the offering plan when purchasing their apartment. The court reaffirmed the Credit Alliance test, emphasizing the requirement of knowledge of reliance by a “known party or parties,” not just a general class of potential purchasers. This decision clarifies the scope of liability for negligent misrepresentation in the context of offering plans and similar documents.

Facts

Cosentini Associates, an engineering firm, designed the HVAC systems for a condominium in Manhattan. The offering plan for the condominium contained descriptions of the HVAC systems, including their capacity to maintain certain temperatures. The plaintiffs purchased an apartment in the building and claimed that the HVAC system was negligently designed, resulting in temperature control issues within their unit. The plaintiffs based their claim for negligent misrepresentation on statements made in the offering plan.

Procedural History

The Supreme Court initially denied Cosentini’s motion to dismiss the claim. The Appellate Division reversed, holding that the plaintiffs failed to adequately allege the necessary relationship between themselves and Cosentini. The plaintiffs appealed to the New York Court of Appeals as of right.

Issue(s)

Whether a claim for negligent misrepresentation can be sustained when the plaintiff has not alleged that the defendant knew the specific party or parties who would rely on the misrepresentation.

Holding

No, because a claim for negligent misrepresentation requires a showing that the defendant was aware that the specific party or parties were intended to rely on the misrepresentation, a general awareness that potential purchasers might rely on the offering plan is insufficient.

Court’s Reasoning

The Court of Appeals relied on the precedent set in Credit Alliance Corp. v Arthur Andersen & Co., which established prerequisites for finding a relationship sufficient to sustain a negligent misrepresentation claim. The court stated that the accountants (or in this case, the engineers) must have been aware that the financial reports were to be used for a particular purpose, in furtherance of which a known party or parties was intended to rely. The court emphasized that the plaintiffs failed to satisfy the second prong of the Credit Alliance test, as they did not sufficiently allege that they were a “known party or parties.” The court noted that while Cosentini knew prospective purchasers would generally rely on the offering plan, there was no indication they knew these specific plaintiffs would be among them, or even that Cosentini knew of their existence when making the statements. The court directly quoted Westpac Banking Corp. v Deschamps: “This is not, however, the equivalent of knowledge of ‘the identity of the specific nonprivy party who would be relying upon the audit reports’”. The court distinguished the case from instances where the defendant had knowledge of the specific entity relying on the information. This case clarifies that a general awareness that a class of people might rely on a statement is insufficient to establish the necessary relationship for a negligent misrepresentation claim; the defendant must know the identity of the specific nonprivy party relying on the statement.