Commercial Division Considers Viability of Fraudulent Misrepresentation Claims Premised on Statements to Third Parties
To state a claim for fraudulent misrepresentation in New York, the plaintiff typically must allege that the defendant made a false statement to the plaintiff. But what if the defendant made the disputed statement to a third party, and the plaintiff claims to have been indirectly injured by that representation? In Harel Alternative Real Est. L.P. v. All Brooklyn Mgmt. LLC, 175 N.Y.S.3d 199 (Sup. Ct. Kings Cnty. Sept. 29, 2022), Kings County Commercial Division Justice Reginald A. Boddie considered whether, and under what circumstances, such a claim is permissible.
In Harel, the plaintiff, Harel Alternative Real Estate L.P. (“Harel”), and the defendant, All Brooklyn Management LLC (“All Brooklyn”), entered into a Cooperation Agreement in connection with a series of joint real estate investments. The agreement provided that Harel would initially own a 90% stake in each of the LLCs formed to make these investments; but “[u]pon certain occurrences, namely the payment of a certain amount of funds to [Harel], the parties agreed that [Harel] would transfer its 90% interest . . . to All Brooklyn.” Harel alleged that, after the parties signed the agreement, All Brooklyn submitted loan applications with several banks to refinance the mortgages on six properties purchased pursuant to the Cooperation Agreement. According to Harel, All Brooklyn “fraudulently misrepresented to [these banks] that All Brooklyn was the sole member of certain borrower LLCs despite [its] knowledge that [Harel] was still the 90%  member.” Harel thus brought a claim for fraudulent misrepresentation premised on All Brooklyn’s allegedly false statements to the third-party banks.
All Brooklyn moved to dismiss Harel’s claim on the ground that “the alleged fraudulent misrepresentation was made to a third-party and not to [Harel].” Specifically, All Brooklyn argued “that a fraud claim requires the plaintiff to have relied upon a misrepresentation by a defendant to his or her detriment,” and because Harel had “fail[ed] to allege any misrepresentation made to [it], or any reliance by [Harel] on any alleged misrepresentation, . . . the fraud claim must be dismissed.” In response, Harel asserted “that it was also a victim of [All Brooklyn’s] misrepresentation because plaintiff justifiably relied upon [All Brooklyn] to act lawfully in the administration of its duties as the managing member of each borrower LLC when applying for loans, and that such reliance was to plaintiff’s detriment.” Harel further claimed that it had been injured by All Brooklyn’s misrepresentations because the allegedly false statements had “expose[d] [Harel] to potential liability to the [third-party banks] and acceleration of the debt and other negative consequences.”
Justice Boddie held that Harel’s allegations were insufficient to state a claim for fraudulent misrepresentation. The court first explained that “[t]he elements of a cause of action sounding in fraud are a material misrepresentation of an existing fact, made with knowledge of the falsity, an intent to induce reliance thereon, justifiable reliance upon the misrepresentation, and damages.” Further, a plaintiff may premise its fraud claim on statements “directed to a third-party” only if “the third-party ‘acted as a conduit to relay [any] false statement[s] to [the] plaintiff, who then relied on the misrepresentation[s] to [its] detriment.” Here, Harel argued only that it had “relied upon [All Brooklyn] to act lawfully,” but did not allege that the third-party banks actually relayed any specific misrepresentations by All Brooklyn to Harel. Because Harel had failed to allege that the banks “acted as a conduit” of any misrepresentations on which Harel relied, Justice Boddie found that these allegations were “wholly insufficient to state a claim for fraud.”
The Harel decision provides two key takeaways for parties seeking to bring fraudulent misrepresentation claims in New York. First, a plaintiff’s mere reliance on the defendant’s broad commitment “to act lawfully,” without more, may be insufficient to establish the reliance element of a fraud claim. Rather, the plaintiff typically must allege that the defendant made a specific and “material misrepresentation of an existing fact,” which the plaintiff relied upon to its detriment. Second, where the defendant made the alleged misrepresentation to a third party, such a statement is unlikely to support a fraud claim unless the third party “acted as conduit to relay” that misrepresentation to the plaintiff. In other words, to state a viable claim, the plaintiff generally must be the direct recipient of a specific, material misrepresentation on which it relied—even if that misrepresentation was originally relayed by the defendant to a third party.