J.P. Morgan Securities Inc. v. Ader

127 A.D.3d 506, 9 N.Y.S.3d 181

• Court: Appellate Division of the Supreme Court of the State of New York
• Decided: April 14, 2015
• Docket: 650005/09 13916 13915
• Status: Published

Opinions

Order, Supreme Court, New York County (Melvin L. Schweitzer, J.), entered June 3, 2013, which, insofar as appealed from as limited by the briefs, granted plaintiffs motion for summary judgment dismissing defendants’ counterclaim for negligent misrepresentation, affirmed, without costs. Order, same court and Justice, entered April 17, 2014, which granted plaintiffs motion to strike defendants’ demand for a jury trial on their counterclaim for fraudulent inducement, reversed, on the law, without costs, and the motion denied.

The motion court properly dismissed defendants’ counterclaim for negligent misrepresentation. “A claim for negligent misrepresentation requires the plaintiff to demonstrate (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” (J.A.O. Acquisition Corp. v Stavitsky, 8 NY3d 144, 148 [2007]). In commercial cases “a duty to speak with care exists when the relationship of the parties, arising out of contract or otherwise, [is] such than in morals and good conscience the one has the right to rely upon the other for information” (Kimmell v Schaefer, 89 NY2d 257, 263 [1996] [internal quotation marks omitted]). Reliance on the statements must be justifiable, and “not all representations made by a seller of goods or provider of services will give rise to a duty to speak with care” (id.). “Rather, liability for negligent misrepresentation has been imposed only on those persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified” (id.). In order to impose tort liability in a commercial case, “there must be some identifiable source of a special duty of care” (id. at 264).

In this context we have held that such a special duty will be found “if the record supports a relationship so close as to approach that of privity” (see North Star Contr. Corp. v MTA Capital Constr. Co., 120 AD3d 1066, 1069 [1st Dept 2014] [internal quotation marks omitted]). Generally, however, an arm’s length business relationship between sophisticated parties will not give rise to a confidential or fiduciary relationship that would support a cause of action for negligent misrepresentation (Greentech Research LLC v Wissman, 104 AD3d 540 [1st Dept 2013]).

The evidence on the record before us, which includes allegations of plaintiffs superior knowledge of the hedge fund business and its past dealings with defendant Ader, who had worked for plaintiffs predecessor in interest for some years, is not sufficient to establish a special relationship that would justify defendants’ reliance on plaintiffs alleged misrepresentations (see Kimmell v Schaefer, 89 NY2d at 257; Greentech Research, 104 AD3d at 540).

With respect to the issue of the application of the jury waiver provision in the parties’ agreement to defendants’ counterclaim for fraudulent inducement, we find that the court erred in granting plaintiffs motion to strike defendants’ jury trial demand.

We have previously held that a contractual jury waiver provision is inapplicable to a fraudulent inducement cause of action that challenges the validity of the underlying agreement (see China Dev. Indus. Bank v Morgan Stanley & Co. Inc., 86 AD3d 435, 436-437 [1st Dept 2011]; Wells Fargo Bank, N.A. v Stargate Films, Inc., 18 AD3d 264, 265 [1st Dept 2005]). Moreover, “[i]t is of no consequence that the [counterclaim] does not contain the word ‘rescission’ or expressly state that it challenges the validity of the . . . agreement” (Ambac Assur. Corp. v DLJ Mtge. Capital, Inc., 102 AD3d 487, 488 [1st Dept 2013]). In cases where the fraudulent inducement allegations, if proved, would void the agreement, including the jury waiver clause, the party is entitled to a jury trial on the claim (see Bank of N.Y. v Cheng Yu Corp., 67 AD2d 961 [2d Dept 1979]; see also Ferry v Poughkeepsie Galleria Co., 197 AD2d 913 [4th Dept 1993]).

As our dissenting colleague acknowledges, “a defrauded party to a contract may elect to either disaffirm the contract by a prompt rescission or stand on the contract and thereafter maintain an action at law for damages attributable to the fraud” (Big Apple Car v City of New York, 204 AD2d 109, 110-111 [1st Dept 1994]). As a result, a party alleging fraudulent inducement that elects to bring an action for damages, as opposed to opting for rescission may, under certain circumstances, still challenge the validity of the agreement (see Ambac Assur. Corp., 102 AD3d at 488).

Thus, where, as here, a party sufficiently pleads that it was fraudulently induced to enter into a contract, and only relies on the agreement as a basis for its defense against breach of contract allegations and a claim for reformation to recover overpayments, it is not precluded from challenging the validity of the contract for purposes of avoiding the jury waiver clause with respect to the adjudication of its fraudulent inducement claim (see Ambac Assur. Corp., 102 AD3d at 488; Wells Fargo Bank, 18 AD3d at 265). Although the dissent contends otherwise, we find that the facts of this case fall within Ambac’s parameters, and thus reinstate defendants’ demand for a jury trial.

We have considered the parties’ remaining arguments and find them to be without merit.

Concur — Sweeny, J.P., Moskowitz, Richter and Clark, JJ.