Opinion ID: 374676
Heading Depth: 1
Heading Rank: 3

Heading: The Court's Charge on the State Fraud Claim.

Text: 27 The judge charged seven elements of common law fraud, each of which plaintiffs were required to prove by clear and convincing evidence. Of these, element 4 was justifiable reliance and element 5 was (t)hat the plaintiffs or their agents acted with due diligence and in good faith. He also charged that the elements of common law fraud were identical to those of the Rule 10b-5 claim, save for the absence of one element (misrepresentation in connection with a sale of securities), the need for proof of all elements by clear and convincing evidence, and a requirement of express misrepresentation rather than mere omission. Thus the jury was effectively told that in addition to establishing justifiable reliance, plaintiffs were required to prove due diligence in investigation as a separate element of a New York fraud claim just as the court had specified for the 10b-5 claim. Appellants contend that this was error. 28 The threshold question is whether appellants effectively objected to the due diligence charge. Appellants made no mention of due diligence in their requested jury charges. Their requested charge 28 required a jury finding that they justifiably relied on the representations of Bankers Trust, and their requested charge 33 stated that justifiable reliance depended on whether the fact represented was such that a reasonable man would consider it important to making a decision, or, alternatively, on whether the person making the representation knew that it would be relied upon even if it were not such a fact. 11 This portrayal of justifiable reliance closely follows a portion of the model charge presented in 2 N.Y. Pattern Jury Instructions Civil, PJI 3:20 at 682-83 (1968). The judge announced that he was granting all but the second alternative of the reasonable reliance definition, i. e., the assertion that reliance might be justified if the person making the representation knew that it would be relied upon. After the charge appellants did not except to the court's introduction of due diligence as a separate element of the fraud charge, but did object to the statement that plaintiff had the burden of showing both due diligence and reliance. While plaintiffs' counsel could surely have done much better in apprising the court of the alleged error, we are inclined to think this was sufficient especially since there must be a new trial in any event. 29 Appellants are correct in their general assertion that New York requires proof of the traditional five elements of fraud: misrepresentation of a material fact, falsity of that representation, scienter, reliance and damages, see, e. g., Jo Ann Homes v. Dworetz, 25 N.Y.2d 112, 119, 302 N.Y.S.2d 799, 803 (1969); 24 N.Y.Jur., Fraud & Deceit § 14 at 47-48 (1962), and does not recognize a separate due diligence element, much less one that must be independently proved by clear and convincing evidence. However, it is not so clear as plaintiffs would have it that New York law does not sometimes introduce due diligence not as a separate element for recovery of a fraud but as incidental to proof of justifiable reliance. Elsewhere the majority position is that plaintiff's negligence will not defeat a fraud claim, and a fortiori that plaintiff is not required to have conducted a due diligence investigation, see Prosser, Torts, § 108 at 115-18, Restatement (2d) Torts § 540, and this broad position is also supported by some New York authority. See Hiliel v. Motor Haulage Co., Inc., 140 N.Y.S.2d 51, 54 (Sup.Ct.Kings Co.1955), aff'd 1 A.D.2d 782, 149 N.Y.S.2d 224 (2d Dep't 1956) (The law does not ordinarily impose upon a defrauded person the duty of investigating fraudulent claims . . . . Even negligence in ascertaining the true facts has been held not to bar the right of recovery); N.Y.Jur., Fraud & Deceit § 176 at 248 (no duty of investigation). The bulk of New York authority, however, appears to follow a two-tier standard in determining plaintiff's duty, according to whether misrepresentations relate to matters that are, or are not, peculiarly within the (defending) party's knowledge. When matters are held to be peculiarly within defendant's knowledge, it is said that plaintiff may rely without prosecuting an investigation, as he has no independent means of ascertaining the truth. 24 N.Y.Jur., supra, § 176 at 247-48, indeed some cases have imposed liability in situations in which plaintiff could have determined the truth with relatively modest investigation. See, e. g., Todd v. Pearl Woods, Inc., 20 A.D.2d 911, 248 N.Y.S.2d 975 (2d Dep't 1964), aff'd, 15 N.Y.2d 817, 257 N.Y.S. 937 (1965) (failure to check defendant's representations against public records no bar to fraud claim); Albert v. Title Guarantee & Trust Co., 277 N.Y. 421, 14 N.E.2d 265 (1938) (failure to investigate land before accepting assignment of interest in mortgage no bar to fraud claim); cf. National Conversion Corp. v. Cedar Bldg. Corp., 23 N.Y.2d 621, 298 N.Y.S.2d 499, 246 N.E.2d 351 (1969) (lawyer's failure to investigate misrepresentation of mixed question of fact and law no bar to client's recovery under fraud claim). By contrast, when misrepresentations have been held to concern matters that were not peculiarly within the defendant's knowledge, New York courts have often rejected plaintiff's claim of justifiable reliance because 30 (if plaintiff) has the means of knowing, by the exercise of ordinary intelligence, the truth, or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations. (Citations omitted). 31 Schumaker v. Mather, 133 N.Y. 590, 598, 30 N.E. 755, 757 (1892). See 24 N.Y.Jur., supra, § 176 at 245-47. Decisions holding that reliance on misrepresentations was not justified are generally cases in which plaintiff was placed on guard or practically faced with the facts. See, e. g., Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 184 N.Y.S.2d 599, 157 N.E.2d 597 (1959) (buyer may not rely on misrepresentations in face of contract clause eschewing such reliance); Sylvester v. Bernstein, 283 A.D. 333, 127 N.Y.S.2d 746, aff'd, 307 N.Y. 778, 121 N.E.2d 616 (1954) (landlord may not rely on tenants' representation that apartment would not be used for residential purposes); Cudemo v. Al & Lou Construction Co., Inc., 54 A.D.2d 995, 387 N.Y.S.2d 929 (3d Dep't 1976) (plaintiff taking possession of garage one week prior to signing after making frequent inspections was not entitled to rely on representations that garage would accommodate her car). This case falls within the first group of New York cases rather than the second. The facts were readily within Bankers Trust's knowledge indeed the jury could permissibly have found that Silverman actually knew them all. In contrast appellants had been complete strangers to the Equity National-Kates transaction. We thus hold the charge as to appellants' being obliged to establish due diligence as an element of their pendent fraud claim was reversible error. 32