Lack of Due Diligence and Awareness of Risks Irrelevant if Claim is for Fraudulent Inducement

In BRL Hampton Rd. LLC v Ashley Heather, et. al., 2022 NY Slip Op 30039(U), the Court granted summary judgment against the party that defaulted on a construction loan even though the lender failed to conduct due diligence, was aware of the risks with a startup, and was the one who offered to lend the funds for the construction project.

The Court found that the defaulting party admitted he consciously chose not to tell the lender that a particular contingent event on which the lender relied in order to funder the loan had not occurred. Therefore, the lender established that the defaulting party made a knowing misrepresentation of material present fact (i.e., the contingent event had not occurred). Thus, the breaching party’s was liable to the lender for the resulting damages.

Interestingly, although there were several documents that memorialized the transaction (including a property lease, an escrow agreement, and promissory note), there was no single “master” document that memorialized the terms of the transaction as a whole. Typically, there is a document that might be captioned “Investment Agreement” (or something similar) that includes all the material terms of the overall transaction, including the ancillary agreements (such as the property lease, an escrow agreement, and promissory note). That “master” document also typically includes (1) representations and warranties that specify the information on which the lender/investor is relying and (2) specifies the contingencies that need to occur and need to be proven to the lender before making the investment. If the parties included such a “master” document, it is possible that the fraud might have been discovered before they entered into the other related contracts.