Fraud Claim Dismissed Due to Plaintiff’s Failure to Exercise Due Diligence

On January 10, 2023, Justice Masley of the New York County Commercial Division issued a decision in Lola Unlimited LLC v. KME Holdings LLC, 2023 NY Slip Op. 30172(U), dismissing a fraud claim due to the plaintiff’s failure to exercise due diligence, explaining:

Plaintiff’s fraud claims ultimately fail because plaintiff does not adequately allege justifiable reliance. Generally, whether a plaintiff could justifiably rely on a false representation is an issue of fact. Nevertheless, as a matter of law, a sophisticated plaintiff cannot establish that it entered into an arm’s length transaction in justifiable reliance on alleged misrepresentations if that plaintiff failed to make use of the means of verification that were available to it, such as reviewing the files of the other parties.

The KME/AK Defendants, citing Centro Empresarial Cempresa S.A. v Am. Movil, S.A.B. de C. V., assert that plaintiff, as a sophisticated entity, had a heightened degree of diligence because it knew it had not received the financial information that it was entitled to under the note. In Centro, the court found that a release in the parties’ contract barred plaintiff’s fraudulent inducement claim because plaintiffs knew that defendants had not supplied them with the financial information necessary to properly value the TWE units, and that they were entitled to that information but they chose to cash out their interests and release defendants from fraud claims without demanding either access to the information or assurances as to its accuracy in the form of representations and warranties.

Plaintiff fails to address Centro other than to say that it did take steps to protect itself and defendants misrepresented the status of the Class C Members and the available capital. Unlike Centro, the 2020 Note did not contain any release. However, plaintiff alleges that, during the negotiation of the 2020 Note, plaintiff requested additional financial reports on December 20, 2019; February 21, 2020; March 2, 2020; and March 25, 2020 that were not provided. As in Centro, plaintiff allegedly knew that it had not been supplied with the financial information it requested before it entered into the 2020 Note, but entered into the 2020 Note anyway.

(Internal quotations and citations omitted).

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