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Justifiable Reliance - Not Always A Jury Question (PA)

November 11, 2021

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<p style="text-align: justify;">A recent case from the Pennsylvania Superior Court is instructive for defendants and their carriers defending against fraud and misrepresentation claims. See e.g.<em> <a href="">Patel</a> v. Kandola Real Estate, LP,</em> et. al, 2021 Pa. Super 219 (Pa Super. Ct. Nov. 8, 2021). The case involved a lease agreement for a gas station and truck stop complex. Patel saw an advertisement on the internet and called to inquire. He then received a prospectus which set forth the approximate gross and net annual income and represented the complex as a “super volume” gas station and “high volume” convenience store. Patel requested financial information and retained counsel to assist in his due diligence prior to executing the lease. In connection with the due diligence, Patel repeatedly inquired into various discrepancies between the financial statements and representations contained in the prospectus. Despite the conflicting information, Patel executed the lease.</p>
<p style="text-align: justify;">Patel operated the complex from June of 2015 through September of 2016 when he closed the truck stop due to loss in revenue. He then sued the owner of the real estate, the sales agent for the lease, and the company with the fuel supply agreement for the gas station asserting multiple claims, including: (1) intentional misrepresentation; (2) negligent misrepresentation; (3) fraud in the inducement. The trial court granted the defendants motion for summary judgment and dismissed the intentional misrepresentation, negligence misrepresentation, and fraud in the inducement claims because the Plaintiff could not establish justifiable reliance on the purported representations. Patel appealed asserting that the question of justifiable reliance is a question of fact for the jury.</p>
<p style="text-align: justify;">The Superior Court began the analysis by considering a plaintiff’s burden of proof on each claim. Fraud or intentional misrepresentation requires a plaintiff to prove six elements: (1) a representation; (2) that is material to the transaction at issue; (3) made falsely, with knowledge of the falsity or reckless disregard as to whether it is true of false; (4) intent to mislead another into relying on the representation; (5) justifiable reliance; and (6) an injury proximately caused by the reliance. Id. (citing <em>Gregg v. Ameriprise Financial, Inc</em>., 245 A.3d 637, 645-646 (Pa. 2021)(internal citations omitted). Negligent misrepresentation requires proof of the following: (1) a misrepresentation of a material fact; (2) made under circumstances in which the actor should have known of the falsity; (3) intent to induce another to act on the representation; and (4) injury caused to the person who justifiably relies on the representation. <em>Id.</em> The major distinction between the two claims is that the negligence claim imposes liability even where the speaker didn’t know the representation was untrue so long as the evidence demonstrates that the speaker failed to make a reasonable investigation into the truthfulness. <em>Id.</em> In Patel, the primary question raised was whether the reliance on the representations was justified.</p>
<p style="text-align: justify;">The Superior Court reiterated that Pennsylvania follows the Restatement (Second) of Tort Sections 540 and 541 as the standard for justifiable reliance. Thus, while the recipient of an allegedly fraudulent misrepresentation is under no duty to investigate the falsity in order to claim justifiable reliance, the recipient is not justified in relying on representations he/she knows to be false. <em>Patel,</em> 2021 Pa. Super. 219 (Pa. Super. Ct. Nov. 8, 2021)(quoting <em>Toy v. Metropolitan Life Insurance Co</em>., 928 A.2d 186, 207 (Pa. 2007). In <em>Patel,</em> the Appellate Court reasoned that while the question of justifiable reliance generally presents an issue of fact for the jury, no question of fact exists where the individual to whom the representation was made relied on his/her own due diligence and not the misrepresentation.</p>
<p style="text-align: justify;">In so holding, the Appellate Court considered the critical concessions made during the course of the plaintiff/appellant’s deposition. Patel admitted to retaining counsel and an accountant to assist with due diligence and negotiation of the lease. Patel also admitted to requesting and obtaining various financial statements as part of his due diligence to ascertain the truth of the representations contained in the prospectus. In reviewing the financial statements, Patel noticed inconsistencies between the numbers contained in the prospectus and the sums reported for tax purposes. Patel approached the owner to discuss the discrepancies and even requested additional information related thereto prior to executing the lease. Since the claims all require evidence of justifiable reliance, summary judgment was proper because Patel admitted he relied on his own due diligence and not any representations of the defendants. The case highlights the vital importance of targeted discovery in fraud and misrepresentation claims based on what a plaintiff’s actions and knowledge base.</p>
<p style="text-align: justify;">In <em>Patel</em>, both the trial and Appellate Court relied heavily on the deposition testimony in finding the reliance was not justified. In the end, the courts focused on two critical facts. First, the fact that the plaintiff questioned the validity of the numbers contained in the prospectus. Second, the plaintiff’s concession that he in fact relied upon all of the information derived from his due diligence and not the misrepresentation alone. The defense of these claims should focus heavily on discovery targeted to develop similar evidence. This would include requests for specific facts/information upon which the plaintiff relied, identification of all individuals/entities with whom plaintiff consulted in making the decision, as well as the specific conduct of the plaintiff in investigating or verifying any of the representations made by the defendants. A strategic decision must then be made as to whether to issue Requests for Admission or to instead depose the plaintiff to obtain the necessary concessions.</p>
Thanks to Jennifer Seme for this post. Please contact<a href=""> Jennifer</a> with any questions.


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