Opinion ID: 766479
Heading Depth: 3
Heading Rank: 1

Heading: Colorability

Text: 50 Under New York law, in order to prevail on a fraud claim, a plaintiff must prove five elements by clear and convincing evidence: (1) a material misrepresentation or omission of fact, (2) made with knowledge of its falsity, (3) with an intent to defraud, and (4) reasonable reliance on the part of the plaintiff, (5) that causes damage to the plaintiff. Schlaifer IV, 119 F.3d at 98. The only element at issue in the case before us is the fourth, reliance. As for this element, 51 if the 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. 52 Id. (quoting Mallis v. Bankers Trust Co., 615 F.2d 68, 80-81 (2d Cir. 1980), cert. denied, 449 U.S. 1123 (1981)). 53 The District Court concluded that SNC's claim was without a colorable basis because it could not have reasonably relied on the Estate's representations since SNC and its attorneys knew, or had the means of knowing, that the representations were unreliable or false. See Schlaifer V, 7 F. Supp. 2d at 375. In support of this conclusion, the District Court relied on its prior decision granting judgment as a matter of law in which it found that: (1) Hughes's representations, by their own terms, were not as sweeping as SNC contended they were; (2) Roger Schlaifer had been told of the existence of a watch deal; (3) the plain meaning of the Agreement did not purport to guarantee the rights to all of Warhol's works; (4) the opinion letter from the pseudo-law firm vouching for the Estate's representations was patently unreliable and, in any event, was received after the Agreement was executed; (5) a 1985 book indicated that there were no copyrights to some of Warhol's works, and that third-parties owned the rights to other works; (6) SNC's attorneys were aware of the Estate's copyright problems and warned of them; (7) both Susan Nance Schlaifer and Roger Schlaifer were aware of the Estate's copyright problems; and (8) the Estate's efforts to limit its liability for continuing to provide copyright information indicated that its rights were not absolute. See Schlaifer III, 927 F. Supp. at 657-59. 54 Although we are convinced, and indeed, bound by our prior decision that these findings support the District Court's grant of judgment as a matter of law, we conclude that they cannot support the District Court's finding that SNC's fraud claim was without a colorable basis. [A] claim is entirely without color when it lacks any legal or factual basis. Sierra Club v. United States Army Corps of Eng'rs, 776 F.2d 383, 390 (2d Cir. 1985) (internal quotation marks omitted) (emphasis added), cert. denied, 475 U.S. 1084 (1986). Conversely, a claim is colorable when it has some legal and factual support, considered in light of the reasonable beliefs of the individual making the claim. Nemeroff v. Abelson, 620 F.2d 339, 348 (2d Cir. 1980) (per curiam). The question is whether a reasonable attorney-and for our immediate purposes, a reasonable plaintiff as well-could have concluded that facts supporting the claim might be established, not whether such facts actually had been established. Id. Thus, as an initial matter, we note that a claim that fails as a matter of law is not necessarily lacking any basis at all. A claim is colorable when it reasonably might be successful, while a claim lacks a colorable basis when it is utterly devoid of a legal or factual basis. Accordingly, judgment as a matter of law against a claim is a necessary, but not a sufficient, condition for a finding of a total lack of a colorable basis. See, e.g., Perry v. Ethan Allen, Inc., 115 F.3d 143, 154 (2d Cir. 1997) (affirming the district court's denial of the defendant's motion for sanctions invoking Rule 11, 1927, and the court's inherent power, despite the district court's grant of judgment as a matter of law to the defendant). 55 Additionally, although certain facts in this case undercut the vitality of SNC's fraud claim, the facts in their totality belie the conclusion that SNC's claim lacked a colorable basis. For instance, Hughes's qualifications to SNC, read in the context of an on-going negotiation, can hardly be considered unequivocal warnings to SNC that the Estate did not own all of the copyrights to Warhol's works. Rather, these particular facts merely indicate, to use the exact words of SNC's attorneys, concerns and potential problems. Concerns and potential problems, however, pervade every transaction and are characteristic of every litigation. Their mere existence, therefore, does not render SNC's reliance on the Estate's representations so utterly unreasonable that SNC's fraud claim was totally devoid of a colorable basis. Rather, even with its awareness of these concerns, the appellants still had some basis to present SNC's claim in court. 56 We note also that the opinion letter issued by the pseudo-law firm vouching for the bona fides of the Estate's copyrights also provides some support for SNC's reliance. Although the letter itself could not have been reasonably relied upon because it was received after the execution of the Agreement, the Estate had promised to submit it to SNC prior to execution of the Agreement. Thus, the reassurance provided by the Estate's promise bolsters the reasonability of SNC's reliance. Indeed, the significance of the Estate's promise takes on added significance in light of the advice given to SNC by its copyright expert. Although the expert advised that SNC should pursue an independent investigation, he also indicated that the Estate was in a better position than SNC to assess the status of the copyrights to Warhol's works since the necessary and relevant documents were maintained by the Estate, see Schlaifer IV, 119 F.3d at 99, and that information concerning the copyright status to Warhol's works was in the special knowledge of the Andy Warhol business representatives. Id. Thus, not only did this advice provide a colorable basis for SNC's reliance on the Estate's representations, it also magnified the reassurance that the promise of the opinion letter represented. In light of these considerations, SNC's faith in the Estate's representations was not entirely inexplicable. 57 Moreover, the jury's verdict in favor of SNC also speaks against the District Court's finding of the absence of colorability-the attorneys were not the only ones who found SNC's claim convincing. Further, the District Court's view in granting judgment as a matter of law, as well as our affirmance thereof, are the result of detached judicial analysis that, made with the benefit of hindsight after all the evidence had been presented at trial, cannot be equated with the advocate's considerations prior to and during the trial. Although we do not hold that a jury verdict in the plaintiff's favor automatically precludes a finding that the claim lacked a colorable basis, we nevertheless conclude that in this case the jury verdict, notwithstanding the fact that reliance was held to be unreasonable as a matter of law, at least indicates that the attorneys were not unrealistic in anticipating that SNC's testimony as to its reliance would be viewed by objective jurors as credible. 58 We conclude that the facts in this case were sufficient to allow the appellants reasonably to believe that they could have established their fraud claim. We are therefore compelled to conclude that the District Court relied on a clearly erroneous assessment of the facts in finding that SNC's fraud claim lacked a colorable basis.