New York Law Review

Tag: reliance

  • J.A.O. Acquisition Corp. v. First Union National Bank, 12 N.Y.3d 148 (2009): Reliance Required for Negligent Misrepresentation

    J.A.O. Acquisition Corp. v. First Union National Bank, 12 N.Y.3d 148 (2009)

    A party asserting a claim for negligent misrepresentation or fraud must demonstrate reasonable or justifiable reliance on the alleged misrepresentation to recover damages.

    Summary

    J.A.O. Acquisition Corp. sued First Union National Bank (now CoreStates) for negligent misrepresentation and fraud, alleging that CoreStates misrepresented the liabilities of D.B. Brown, Inc., a company J.A.O. was acquiring. The alleged misrepresentation was the omission of a $1.3 million deficiency in D.B. Brown’s operating account from a payoff letter provided by CoreStates. The New York Court of Appeals held that J.A.O. failed to raise a triable issue of fact regarding reliance on the payoff letter because J.A.O.’s decision to purchase D.B. Brown’s stock resulted from its own investigation, not reliance on the letter.

    Facts

    J.A.O. agreed to purchase D.B. Brown’s stock, with the agreement listing D.B. Brown’s net worth at $2.2 million. Chase Manhattan Bank financed the deal, requiring J.A.O. to demonstrate excess borrowing availability of $2 million. J.A.O.’s due diligence revealed D.B. Brown was worth less than represented, leading to an amended agreement. On the closing date, CoreStates sent a payoff letter stating D.B. Brown’s liabilities were $26,564,628.29. Checks presented that day created a $1.3 million deficiency in D.B. Brown’s account, which wasn’t included in the payoff letter. To meet Chase’s borrowing requirement, D.B. Brown invoiced questionable foreign receivables. Chase financed the deal, and CoreStates requested payment of the $1.3 million the next day, which Chase paid.

    Procedural History

    J.A.O. sued CoreStates for negligent misrepresentation and fraud in New York State Supreme Court. The Supreme Court granted CoreStates’ motion for summary judgment, dismissing the complaint. The Appellate Division affirmed the Supreme Court’s decision. The New York Court of Appeals granted J.A.O. leave to appeal.

    Issue(s)

    Whether J.A.O. demonstrated sufficient reliance on CoreStates’ payoff letter to sustain claims for negligent misrepresentation and fraud, given J.A.O.’s independent due diligence and actions taken to close the deal despite awareness of D.B. Brown’s financial condition.

    Holding

    No, because J.A.O.’s decision to purchase D.B. Brown’s stock resulted from its own investigation of D.B. Brown’s financial condition and its strong desire to complete the transaction, not from reliance on the information contained in the payoff letter.

    Court’s Reasoning

    The court stated that a claim for negligent misrepresentation requires: “(1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information.” Even assuming the first two elements were met, J.A.O. failed to prove reliance. J.A.O. conducted its own due diligence, determined D.B. Brown was worth less than initially represented, and amended the purchase agreement accordingly. J.A.O.’s chief financial officer testified that the payoff letter amount had no effect on J.A.O.’s desire to purchase D.B. Brown’s stock. Furthermore, the court noted that it was Chase, the financier, who would have relied on the payoff letter for purposes of the borrowing availability requirement, not J.A.O. The court concluded that because J.A.O. demonstrated a strong desire to complete the transaction regardless and undertook independent investigation, justifiable reliance, an element of both negligent misrepresentation and fraud, was absent.

  • People v. Termini, 72 N.Y.2d 1009 (1988): Establishing Reliance in Larceny by False Pretenses Against a Bank

    People v. Termini, 72 N.Y.2d 1009 (1988)

    In a larceny by false pretenses case against a bank, reliance can be established by showing that a bank employee involved in the loan process was induced by the defendant’s misrepresentations to recommend the loan, even if that employee did not have final approval authority.

    Summary

    The defendant was convicted of larceny by false pretenses for obtaining loans from several banks through intentional false statements about his financial status. The New York Court of Appeals affirmed the conviction, holding that the element of reliance, necessary for larceny by false pretenses, can be established by showing that bank employees involved in the loan application and approval process relied on the defendant’s misrepresentations in recommending the loan, even if they did not have the final authority to approve the loan. This decision clarifies the scope of reliance required when the victim of the larceny is a corporate entity like a bank.

    Facts

    The defendant, Termini, obtained eleven loans from six different banks. He was subsequently convicted of larceny by false pretenses. The prosecution argued that Termini made intentional false statements concerning his financial status when applying for these loans. Bank employees involved in the application and approval process testified that they relied on Termini’s false representations when recommending that the bank approve his loan requests.

    Procedural History

    The defendant was convicted of larceny by false pretenses at the trial court level. He appealed the conviction, arguing that the prosecution failed to adequately establish the element of reliance, specifically claiming that the bank agents who relied on his misrepresentations did not have the authority to grant final loan approval. The Appellate Division affirmed the conviction, and the defendant appealed to the New York Court of Appeals.

    Issue(s)

    Whether, in a larceny by false pretenses case where the victim is a bank, the element of reliance can be established only by showing that the corporate agent with final loan approval authority was the one induced by the false representations, or whether it is sufficient to show that another agent involved in the transaction was induced to recommend the loan.

    Holding

    No, it is not necessary to show that the corporate agent with final loan approval authority was the one directly induced by the false representation. Yes, it is sufficient to show that an agent involved in the transaction was induced by the defendant’s misrepresentations to recommend that the bank authorize the loan because such reliance contributes to the ultimate decision to grant the loan.

    Court’s Reasoning

    The Court of Appeals rejected the defendant’s argument that reliance could only be established by demonstrating that the bank employee with final loan approval relied on the false pretenses. The court reasoned that proving reliance only requires showing that an agent involved in the loan transaction was induced by the defendant’s misrepresentations to recommend that the bank authorize the loan. The court highlighted the practical realities of corporate decision-making, stating that recommendations from employees involved in the loan process contribute to the bank’s ultimate decision. The court cited People v Drake, 61 NY2d 359, 362, emphasizing that larceny by false pretenses requires obtaining property through an intentional false statement concerning a material fact upon which the victim relied. The court found sufficient evidence that bank employees relied on Termini’s misrepresentations in recommending loan approval, thus supporting the larceny conviction. The court did not explicitly discuss any dissenting or concurring opinions.

  • CBS, Inc. v. Ziff-Davis Publishing Co., 75 N.Y.2d 496 (1990): Reliance on Express Warranties as Part of the Bargain

    CBS, Inc. v. Ziff-Davis Publishing Co., 75 N.Y.2d 496 (1990)

    In a breach of express warranty claim, the buyer’s reliance is established if the express warranties were bargained-for terms of the contract, even if the buyer doubted the truth of the warranted facts before closing.

    Summary

    CBS sued Ziff-Davis for breach of express warranties concerning the profitability of magazines CBS purchased from Ziff-Davis. CBS, after signing the purchase agreement but before closing, discovered information suggesting the warranted financial statements were inaccurate. Despite these concerns, CBS closed the deal, reserving its rights. The New York Court of Appeals held that CBS could pursue its breach of warranty claim because the warranties were bargained-for terms of the contract. The court distinguished reliance in contract law from reliance in tort-based fraud claims, emphasizing that CBS relied on the warranty itself as part of the agreement, not necessarily on the truth of the underlying information.

    Facts

    1. Ziff-Davis, through Goldman Sachs, solicited bids for its consumer magazines, providing financial information.
    2. CBS submitted a bid based on Ziff-Davis’s representations.
    3. CBS and Ziff-Davis entered into a purchase agreement containing express warranties regarding the accuracy of the financial statements.
    4. CBS performed due diligence and discovered potential inaccuracies in Ziff-Davis’s financial reports.
    5. CBS notified Ziff-Davis of its concerns, but Ziff-Davis insisted on closing, threatening legal action if CBS failed to proceed.
    6. The parties closed the deal with a mutual understanding that the closing did not waive any rights or defenses.
    7. CBS then sued for breach of warranties.

    Procedural History

    1. The Supreme Court dismissed CBS’s breach of warranty claim, holding that CBS’s admission that it did not believe the representations were true was fatal to the claim.
    2. The Appellate Division affirmed for the reasons stated by the Supreme Court.
    3. The New York Court of Appeals granted leave to appeal.

    Issue(s)

    1. Whether a buyer must believe in the truth of warranted information to maintain a breach of express warranty claim, or whether it is sufficient that the warranty was a bargained-for term of the contract.

    Holding

    1. No, because the critical question is not whether the buyer believed in the truth of the warranted information, but whether it believed it was purchasing the seller’s promise as to its truth.

    Court’s Reasoning

    1. The court distinguished between reliance in tort (fraud) and reliance in contract (breach of warranty). In a contract for express warranty, reliance means that the warranty was a bargained-for term.
    2. The court cited Ainger v. Michigan General Corp., stating the crucial question is whether the buyer believed it was purchasing the seller’s promise.
    3. The court noted, “[Warranty] is intended precisely to relieve the promisee of any duty to ascertain the fact for himself; it amounts to a promise to indemnify the promisee for any loss if the fact warranted proves untrue.”
    4. The court emphasized that express warranties are integral to the contract, and the right to indemnification depends on proving the warranty was breached, not on proving the buyer believed in the truth of the warranted facts after the contract was formed.
    5. The court rejected Ziff-Davis’s argument that CBS’s disbelief in the truth of the warranted information relieved Ziff-Davis of its obligations, stating that such a holding would deprive the express warranties of their value.
    6. The court noted that the Uniform Commercial Code is instructive: Acceptance of goods doesn’t impair other remedies for nonconformity, including damages for breach of an express warranty.
    7. The court viewed the warranty as a continuing promise to indemnify CBS if the warranted facts proved untrue, regardless of CBS’s doubts before closing.