Walid v. Yolanda for Irene Couture, Inc.., 425 N.J. Super. 171 (App. Div. 2012). It is elemental that “justifiable reliance” on an allegedly fraudulent mispresentation is necessary to make out a fraud claim. But cases on what does or does not constitute justifiable reliance are relatively few, especially recently. This decision, written by Judge Kennedy, is a useful guide to that issue, and others.
Plaintiffs bought a bridal shop from one of the defendants. Plaintiffs had no experience in the bridal field. The purchase was subject to a review by their attorney and accountant and “pro[of] of sales.” Plaintiffs decided not to retain an accountant, despite their attorney’s advice that they do so, deciding instead that one of the plaintiffs would review the financial information that the seller provided. The principal of the seller provided various financial documents, which plaintiff reviewed. Plaintiffs then signed a contract that provided, among other things, that “Buyer relies upon their [sic] own evaluation, inspection and legal search of the business and does not rely upon any representations that are not contained in writing in this contract of sale.”
The business failed. Plaintiffs sued the seller, its principal, and the accountants who provided the financial information that one of the plaintiffs reviewed. Plaintiffs claimed that defendants fraudulently induced them to buy the business. A bench trial “on the papers” resulted in a verdict for defendants. Though the trial judge found that the seller had fraudulently inflated the revenue of the business, with the intent that plaintiffs would rely on the inflated figures and buy the business. However, the court went on to find that plaintiffs had failed to show reasonable reliance. Accordingly, the trial court ruled for defendants.
Plaintiffs appealed. Judge Kennedy observed that while appellate review of adequately supported factual findings is deferential, the appellate function broadens somewhat when the lower court’s evaluation of facts and the implications to be drawn therefrom are involved. Moreover, a trial judge’s “interpretation of the law and the legal consequences that flow from established facts are not entitled to any special deference.”
Judge Kennedy then presented a detailed discussion of reasonable (or “justifiable”) reliance. Important principles for this case were (1) a party who is not knowledgeable in a transaction may be reasonable in relying on a representation that a more experienced party would recognize as false, and (2) a party is justified in relying on a representation even though, had the party investigated, the party would have learned that the representation was false. In short, there is no duty to investigate. An independent investigation, however, can preclude justifiable reliance.
Here, those principles required reversal of the verdict against plaintiffs. Since neither plaintiff had any experience or expertise in the bridal business, “it would not have been obvious to them that the income figures for [the business] were inflated.” Moreover, plaintiffs had not done an independent investigation. They merely relied on the inflated financial figures that defendants gave them. “[I]t cannot be said that a purchaser relies on his own investigation by, in fact, examining falsified records.”
Finally, defendants could not hide behind the contractual recitation that plaintiffs had relied on their own investigation. A party perpetrating a fraud cannot place into a contract a general “no representations” clause so as to insulate itself from prior intentional misrepresentations of material facts that are peculiarly within the misrepresenting party’s knowledge. The panel found the seller and its principal liable for fraud, and remanded to the trial court for further findings as to the liability of the other defendants, as well as on compensatory and punitive damages, counsel fees, and costs.