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SHORT FORM ORDER
SUPREME COURT - STATE OF NEW YORK
PRESENT: HON. ANTHONY F. MARANOJustice. TRIAL/IAS PART
NASSAUCOUNTY
EASTCHESTER REHAILITATION AND HEALTH CARE CENTER, LLC
EASTCHESTER REALTY ASSOCIATES, LLC SPLIT ROCKREHAILITATION AND HEALTH CARE CENTER , LLC
BENJAMIN LADA; and BENT PHILIPSON;
Plaintiffs,
-against-MOTION #001INDEX # 13314/07
CONNOR DAVIES MUNNS & DOBBINS, LLP;
Defendant.
The following papers having been read on these motions:
Notice of Motion, Affirmation andExhibits. .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . .
Defendant' s Expert' s Affidavit in Support andExhibits. .
. . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . , . . . . . . . , . . . . , . , . . . . , . . , . "
Statement of Uncontested Material Facts pursuant toRule 19-a..............................................
. . . . . . . . . . . . . . . .
Affidavits, Affirmation in Opposition andExhibits. .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plaintiff' s Expert' s Affidavit in Opposition andExhibits. .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
............,......... 5Plaintiff' s Rule 19-a Statement........................
.. ..
............ 6Affirmation in Further Support and Exhibits... .
. . . . . . . . . . . . . . . . . . . . . . . ..
Memorandum of Law in Support. . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Memorandum of Law inOpposition. .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . .. . .. " .. . . . .. . . . . . . .
Memorandum of Law in Further Support................
. . . . . . . . . . . . . . . . . . .
Upon the foregoing papers the motion by defendant,0' Connor Davies Munns & Dobbins, LLP, for an order pursuant
to CPLR 3212, granting summary judgment dismissing the
plaintiffs' complaint, is denied.
This is an action to recover money damages arising out
of defendant' s, O' Connor Davies Munns & Dobbins, LLP, (ODMD)(previously known as Munns & Dobbins) alleged fraud, inconnection with the plaintiffs' purchase of the assets and
real property of two skilled nursing faci I ities, Split Rock
Multi Care Center LLC (Split Rock) and Eastchester Health
Care Center LLC (Eastchester) (collectively referred to as
the facilities). The facilities, now known as Split Rock
Rehabilitation and Health Care Center and Eastchester
Rehabilitations and Health Care Center , are two of the
plaintiffs in this action. The former Split Rock and
Eastchester facilities were owned, operated and sold by Abe
Zelmanowicz and his family members (Sellers), to the
plaintiffs, uyers), the limited liabili ty companies andtheir principals
The buyers and sellers entered into a Purchase
Agreement (agreement) for the two facilities on June 21,
2001 and closed on September 19, 2002.
The plaintiffs' allege that they overpaid for thepurchase of the facilities due to the sellers' fraudulent
misrepresentation of the facilities' operating income,
occupancy, income, costs and fraudulently overchargedMedicaid for "bed holds" and "vent beds" . 1 The plaintiffscommenced a separate action against the sellers to recover
money damages for fraud and breach of contract.
This action is against defendant, ODMD, an accounting
firm that performed the outside audits of the financialstatements of the facilities for the prior owners for the
years ending 1998- 2001. The plaintiffs allege they relied on
the audited reports of the facilities' financial statements,issued by ODMD, in its determination to enter into anagreement to purchase and go through with the purchase of
the facilities for 37 Million dollars. That ODMD'
audited reports falsely represented the financial position
of the facilities and ODMD, knew its audited reports
misrepresented the facilities' financial positions at the
time they were issued.The plaintiffs commenced this action, on July 31,
1 Split Rock Multi Care Center LLC., Eastchester Health CareCenter LLC., and Abe Zelmanowicz were indicted and plead guiltyto one count of grand larceny in the second degree (Penal Law 155. 40), in connection with the subject medicaid overcharges. Inconnection with his guilty plea, Mr. Zelmanowicz, was to receivea sentence of two to six years incarceration and entered aconfession of judgment for the payment of six million dollarsover three years. (see Def. Kelly Aff , Ex T and Pltf. LichtensteinAff Ex. A Transcript of the plea, dated April 11, 2007).
2 That action is pending in Supreme Court New York County.The complaint in that action alleged, inter alia, that thesellers falsely: inflated their operating income; reduced theiroperating losses and inflated their occupancies (Kelly Aff. Ex. Iat 27) .
- .
2007, 3 by the filing of a Summons with Notice, asserting thenature of the action as fraud and seeking money damages
(PI tf Lichtenstein Aff. Ex. B). The complaint, datedNovember 6, 2007, sets forth one cause of action sounding in
fraud and alleging money damages in an amount of no lessthan $12, 50 0 , 0 0 0 . (Def Kelly Aff. Ex. A).
In essence, the plaintiffs allege they sustained
damages as a result of ODMD' s fraudulent acts of issuing
unqualified and false opinions in its audited reports of the
facilities' 1998- 2001 financial statements for the two
facili ties. That ODMD, discovered when conducting its first
audit, of the facilities' financial statements in June
1999, that the facilities were knbwingly over billing
Medicaid for reimbursements on bed holds they were not
entitled to as they had less than the required census of 95%
occupancy. The improper billing continued unabated for the
four years ODMD performed the audits of the facil i ties'financial statements, from 1998- 2001, without any repayment
being made to Medicaid, or any increase in the reserve
purportedly set up for repayment of over billings.
The plaintiffs contend ODMD' s conduct was so grossly
negligent and reckless as to constitute fraud. That ODMD'
opinions that the financial statements presented fairly in
3 Defendant incorrectly asserts this action was commenced in November 2007. Howeverthe action was actually commenced on July 31 , 2007 , when the plaintiffs filed the Summons withNotice (see CPLR ~ 304 (a) nd 203 (c) ) .
all material respects the financial positions of the
facilities were false and misleading as the reported
Medicaid revenue was overstated and obtained as a result of
improper and unjustified billings to Medicaid, that it was
fully.aware of.
The following facts are not in dispute: on or about
June 21, 2 0 0 1, 4 the sellers entered into a purchase
agreement (agreement) with the buyers (plaintiffs) for the
sale of the two facilities, Eastchester, a 200 bed skilled
nursing facility with 16 certified ventilator beds (Vent
Beds), and Split Rock, a 240 bed skilled nursing facility
with 27 Vent Beds, and the real property on which they were
located, for the total sum of 37, 000, 000; ODMD , in its
audi ted reports that accompanied the facil i ties' financialstatements for the years of 1998, 1999, 2000 and 2001 , set
forth the financial reports presented fairly in all material
respects the financial positions of the facilities. (Def.
Kelly Aff Exs. J -Q are the financial statements); Theplaintiffs, shortly after they ' took possession and began
operating the facilities, after the closing on September 19,
2002 discovered that the sellers improperly billed and
recei ved reimbursements from Medicaid for Bed Holds and Vent
Beds at both facilities; from at least October 1999 through
4 Pursuant to the agreement, the plaintiffs paid the sum of$1 425 OOO upon execution of
the agreement as a down payment (Kelly Aff. Ex. H section 3.4. 1). As the purchase was subjectto the NYS Department of Health' s approval , an extended period of time to close was provIdedfor by the paries.
December 31, 2001, independent auditor
That ODMD was retained as the
to audit the financial statements for
the facilities for the years ending December 31, 1998,
December 31 , 1999, December 31, 2000, December 31, 2001 and
provided audited reports to the prior owners of the
facilities ODMD, whi Ie conduct ing the audi t of thefacilities 1998 financial statements, recognized an issue
existed regarding the propriety of the Bed Hold and Vent Bed
charges and brought this concern to the attention of
management for the prior owners and recommended that they
retain an attorney to analyze whether the facilities' Bed
Hold and Vent Bed charges were proper and to assist the
facilities with compliance; ODMD also recommended a reserve
fund be established to repay Medicaid or any other third
party payors such as private insurers, if it was determined
there was overbilling. Management of each facili
established a reserve fund which was indicated in the
financial statements by the line item "due to third party
payor" (Kelly Aff Ex. J - Q).
The plaintiffs allege in the complaint that ODMD knew
5 Bed Hold- a facility is reimbursed for holding a bed, for up to 20 days for a patient thatwas transferred to a hospital. However, to qualify for bed hold reimbursement the patient must.have been a resident at the facility for at least 30 days prior to the hospital admission and thenursing home had to have at least a 95% occupancy ( 14) .
Vent Bed- a facility receives Medicaid reimbursement at ahigher rate for a Vent Bed only when a designated Vent Bed isoccupied by a certified Vent Bed patient. The facility is notentitled to the higher Vent Bed charge, if either a certifiedVent Bed patient is in a non-Vent Bed, or a Vent Bed is occupiedby a non-certified Vent Bed patient (,- 15) .
the facilities were over billing, or al ternati vely failedto verify the propriety of the Bed Holds and Vent Bed
billings and as such the financial statements of both
facili ties, audited by ODMD, were false and misleading as
the reported Medicaid revenue was overstated and obtained.due to improper and unjustified billings. (Complaint s 21-
29). That ODMD intentionally or recklessly misrepresented
the financial statements fairly presented in all material
respects the financial positions of the facili ties, which
it knew would be relied upon by the plaintiffs or other
prospective purchasers. That had the plaintiffs known of
the true and accurate Bed Holds and Vent Bed reimbursements
the facilities were entitled to from Medicaid they would not
have entered into the purchase agreement or purchased the
facili ties for the agreed to amount. (Complaint s 30- 31).
The plaintiffs allege they relied on the audited
financial statements for the facilities for the years of
1998 , 1999, 2000 and 2001, that were provided to them by the
sellers, in determining the purchase price and going through
with the purchase of the facilities. The agreement provided
for a down payment of $1, 425, 000 with the balance due at
closing, less customary adjustments.
ODMD contends that the financial statements did
represent the financial position of the facilities as they
contained a line item "due to third party payor, " for
potential repayments that might have to be made to Medicaid
or other third parties for overbilling.determined the amount for the reserve.
That management
ODMD was not
invol ved in creating the reserve or determining properbilling procedures and was only responsible to review
management' s process for determining the reserve and provide
its opinion whether the process and method was reasonablypresented in the financial statements.
The defendant asserts that before plaintiffs entering
into negotiations to purchase the facilities, Benj amin Landa
(Landa) and Bent Philipson (Philipson), were sophisticated
buyers who had prior experience, owning and operating
nurs ing homes, as they had been involved in over 20 nurs ing
home acquisitions and sales, and owned almost a dozen
facili ties at the time of the negotiations.
The agreement (Kelly Aff Ex H) provided the plaintiffswith a 60 day "due diligence"6 period from execution of the
agreement, after which the agreement was binding but subj ect
to the approval of the Department of Heal th (DOH). Due to
the requirement that the transfer of ownership must be
Section 11. 1 - BUYERS' DUE DILIGENCE , provides: Duringthe sixty (60) day period following the date of which Organizersreceive a fully executed duplicate original of this Agreement(the Due Diligence Period) Sellers shall provide Organizers andtheir representatives with (a) all information reasonablyrequested by Organizers with respect to the operations , finances.Assets and liabilities of the Facilities and the Property, and(b) reasonable access to the Property and the Facilities duringnormal business hours for purposes of inspection and testing.Organizers and their representatives shall maintain theconfidentiality of all such information provided by Sellers.
approved by the DOH, an extended period of time for theclosing was provided for in the contract. The closing did
not take place until September 19, 2002, (approximately 1
year and 3 months after the execution of the agreement).
Now on this motion defendant, ODMD , avers, inter alia,the complaint should be dismissed as barred by the six yearstatute of limitations, as this action sounding in fraud,was not commenced until November 2007, more than six years
after the fraud claim accrued, when the plaintiffs entered
into the agreement, made the downpayment and the 60 day due
diligence period expired. ODMD further asserts the
plaintiffs failed to conduct any due diligence, and as such,
plaintiffs as sophisticated purchasers cannot establish they
justifiably relied on ODMD' s alleged misrepresentations.
ODMD further argues there was no fraud on its part, as
the alleged misstatements were not made with the intent to
deceive the plaintiffs or anyone else. The audi ted reportswere prepared for the prior owners who knew about thebilling methodology and about the issue of the possible
overbilling and repayment for Bed Hold and Vent Bed charges.The plaintiffs were not the intended users of the audited
report s That the plaintiff cannot demonstrate an
. intentional misstatement as ODMD did not depart fromprofessional standards. That defendant' s expert Mr. Love, a
renowned accounting and auditing expert, explained in hisaffidavi t that, audi tors use professional judgment and
though some may choose different methods or auditing
procedures, using professional judgment is not a departure
from standards. Mr. Love further explained the professional
standards and opined that ODMD' s audit did not depart from
professional standards. The defendant further asserts that
the plaintiffs' theory of damages is not recognized at law
and plaintiffs cannot establish either their claim for
damages or that they actually suffered any damages.
In opposition, the plaintiffs aver, inter alia, thatthe action was timely commenced, on July 31 , 2007 and not in
November 2007 , as incorrectly asserted by defendant. That
the action is for fraudulent misrepresentation, not
fraudulent inducement, and as such the claim accrued when
ODMD issued the false and misleading financial statements
the plaintiffs relied upon in its determination regarding
the purchase of the facilities from ODMD' s clients,
including the last ones issued by ODMD for Split Rock on May
, 2002 (Kelly Aff Ex. and Eastchester on May 31, 2002
(Kelly Aff Ex Q) . Tha t ODMD was aware the f inanc ial
statements would be used either by plaintiffs or some other
buyer in connection with the sale of the facilities.Particularly as the facilities' 2001 financial statements
that ODMD audited and issued its reports on in May 200l,
specifically noted that the sellers had entered into a
contract to sell all of the asserts and the land of the
facilities, and the agreements were contingent on the
approval of the Public Health Council (PHC) of the New York
State DOH. The plaintiffs assert that ODMD knew its audited
reports were relied on by parties other than the sellers, as
ODMD sent reports to the NYS DOH which relied upon them and
they became publ i c records.
The plaintiffs further assert that while justifiable
reliance is usually an issue of fact, they can demonstrate
they justifiably relied on ODMD' s misrepresentations. That
the plaintiffs conducted their due diligence before entering
into negotiations with the sellers as they obtained the
costs reports for the facilities, filed with the NYS DOH
which included ODMD' s audited reports of the facilities'1998 and 1999 financial statements, wherein ODMD provided
its opinions, that the financial statements presented
fairly, and in all material respects, the financialpositions of facilities.
The plaintiffs also assert that it continued its due
diligence, from the time it entered into the agreement until
the closing in September 2002 , as they would periodically
request and receive updated financials and census
information from the sellers which included documents with
the defendant' s letterhead.
The plaintiffs' further argue that, based upon the
conflicting opinions of their experts, questions of factexist concerning departures from professional standards
precluding the granting of summary judgment.
The plaintiffs also contend the branch of defendant'
motion based upon proof of damages is premature as the
action was bifurcated with expert disclosure on damages to
be exchanged only after the liability determination. That
they will be able to prove the actual pecuniary loss they
sustained as a direct result of the defendant' s fraudulent
acts, at trial, and that damages is an issue of fact
precluding dismissal of the complaint on a motion for
summary judgment.
In reply? the defendant reiterates its contention thatthe claim was time barred when commenced because once the
due diligence period expired the plaintiffs were bound by
the agreement and the claim accrued.
Defendant further asserts that since the plaintiffs,
their opposition, acknowledged they relied on the allegedly
fraudulent audited reports of the 1998 and 1999 financialstatements, prior to entering into the thirty seven million
dollar purchase agreement and paid the essential non-
refundable down payment. That plaintiffs' opposition to the
statute of limitations bar comes down to one point, that the
action is timely because ODMD issued an audited report
within the six years prior to the commencement of this
7 Based upon the plaintiffs ' opp'osition which included Philpson s Affidavit withpreviously undisclosed items he descnbed as some of the due diligence documents, the defendantconducted further, continued, depositions of Landa and Philipson, before submitting its reply.
action , even though it was after the agreement was entered
into and the due diligence period expired.
ODMD does not dispute issuing the May 2002 audit
reports, but argues those reports were not and could not
have been relied upon by the plaintiffs in entering into the
purchase agreement and making their decision to purchase the
facili ties for thirty seven million dollars. That plaintiff,Landa testified the only audited financials statements he
could possibly be aware of at the time of entering into the
agreement and making the down payment were the 1998 and
1999 audited financial statements. (Kelly Aff . Ex. COriginal Landa dep. pg. 87). Defendant also asserts that
contrary to the plaintiffs ' contentions, the claim did not
accrue on the closing date, but when all the elements of the
alleged fraud were in place that the plaintiffs could have
brought suit, which occurred when the agreement was
executed, the downpayment made and the day due diligence
period expired.
ODMD asserts the plaintiffs' claims of conducting due
diligence were not related to the purchase of the facilities
but were instead designed to assist the plaintiffs to
prepare their new team to manage the facilities after
8 Section 11. 1 of the Agreement provides a (60) day due diligence period from execution.Section 11. 3 of the Agreement, provides the buyers wi th an
absolute right to terminate up to the expiration of the duediligence period.
closing. The defendant also asserts that while the financialstatements did not contain the word fraud" they did have a
line for overpayment, labeled, "Due to third party payors"
which was the reserve amount being held to repay Medicaid
and Medicare, if it was determined that the sellers' Bedd
Hold and Vent Bed charges were improper. That despite the
inclusion of that line item in the financial statements the
plaintiffs never questioned what that entry was for or why
it was in the financial statements. ODMD asserts theplaintiffs, one of the most experienced nursing home owners
in the New York metropolitan area, were in a position
examine and gain an understanding of the facilities on their
own without reliance on any historic financial statements.
And if they inquired with ODMD about the financialstatements. ODMD would have told them about the sellers
billing policies, including that since it was unsure if the
Bed Hold and Vent Bed charges were appropriate, they advised
the sellers to have an attorney look into the propriety
the billing charges, the sellers did retain an attorney
evaluate their billing procedures, a reserve was established
to repay any overbilling and that ODMD evaluated the reservefor reasonabfleness. However , ODMD contends that because the
plaintiffs did not conduct any due diligence and did not
inquire with ODMD or the sellers about the line entry they
cannot have justifiably relied on any alleged misstatementcontained in ODMD' s audited reports.
ODMD also asserts the required element in fraud of
scienter is absent as there was no intent by ODMD to
decei ve the plaintiffs or anyone else. That it cannot be
disputed there was no intent by ODMD to deceive since the
information in the financial statements was understood and
known to the prior owners/sellers who were the intended
recipients. ODMD further avers that the plaintiffs argument
that ODMD knew the financial statements were going to be
relied on by the plaintiffs in purchasing the facilities is
wi thout basis and does not establish scienter.
ODMD also asserts that the plaintiffs' expert, Mr.Gertzel' s, affidavit is conclusory and at most asserts a
claim for malpractice, but does not and cannot establish any
fraud by ODMD. Mr. Getzel' s opinion is without basis as he
does not explain how an alleged departure from standards
equates to recklessness or fraud, and in fact does not even
define the term reckless. In fact, even if every criticism
of the audits leveled by Mr. Getzel is accepted without
question , it cannot be said that the audit performed by ODMD
was a sham audit or amounted to no audit at all, as at most
is a disagreement between experts that more could have
been done. While this would be sufficient to raise an issue
of fact to defeat summary judgment in a malpractice case, itis not sufficient in a fraud case.
As to the issue of damages, ODMD asserts the plaintiffconceded that it offered no evidence in support of damages,
and that the plaintiffs are wrong that the Court in
bifurcating the trial eliminated the damage issue from
consideration on a motion for summary judgment at this
point.
On a motion for summary judgment pursuant to CPLR
3212, the proponent must make a prima facia showing of
entitlement to judgment as a matter of law, tendering
sufficient evidence to demonstrate the absence of any
material issues of fact. II Sheppard-Mobley v. King, 10 AD3d
70, 74 Dept. 2004), aff'd as mod ., 4 NY3d 627 (2005),
ci ting Alvarez v. Prospect Hosp. , 68 NY2d 320, 324 (1986);
Winegrad v. New York Univ. Med Ctr ., 64 NY2d851, 853 (1985).
Failure to make such prima facia showing requires a denial
of the motion, regardless of the sufficiency of the opposing
papers. Sheppard-Mobley v. King supra at 74; Alvarez v.
Prospect Hosp
.,
supra; Winegrad v. New York Uni v. Med Ctr.
supra. Once the movant' s burden is met, the burden shifts to
the opposing party to establish the existence of a material
issue of fact. Alvarez v. Prospect Hosp
.,
supra at 324. The
evidence presented by the opponent of summary judgement must
be accepted as true and must be given the benefit of every
reasonable inference. See, Demishick v. Community Housing
Management Corp ., 34 AD3d 518, 521 Dept. 2006) citingSecof v. Greens Condominium, 158 AD2d 591 (2nd Dept. 1990).
Statute of Limitations
An action based upon fraud shall be commenced within
the greater of six years from the date the cause of action
accrued or two years from the time the plaintiff discovered
the fraud or could with reasonable diligence have discovered
it. CPLR ~ 213 (8) . For a fraud claim to be timely it must
have been commenced within six years of the date of the
fraudulent act. (see Kaufman v Cohen, 307 AD2d 113 ( 1
Dept.. 2003); Carbon Ca ital M LLC
Co. , 88 AD3d 933, 939 Dept. 2011)).
v. American Express
A cause of action
accrues, for the purpose of measuring the period of
limitations, when all of the facts necessary to the cause
action have occurred so that the party would be entitled to
relief in court" Poughkeepsie v. Espie , 41 AD3d 701, 704
Dept. 2007), app. dism., 9 NY3d 1003 (2007),
(citations omitted); (see also Kronos. Inc.. v. AVX Corp.
81 NY2d 90, 94 (1993); Booth v meriquest Mortgage Co. , 63
AD3d 770, 771 Dept. 2009); Roldan v. Allstate Ins. Co.
149 AD2d 20, 26 Dept. 1989)). For a fraud cause
of action , accrual occurs at the time the plaintiff
possesses knowledge of facts from which the fraud could have
been discovered with reasonable diligence. Poughkeepsie v.
Espie supra at 705 (town cause of action for fraud accrued
when it executed more expensive lease agreement that
defendant, allegedly falsely, represented was necessary for
unexpected renovations costs).
iI.
The plaintiffs are not seeking to use the discovery
accrual rule, but contend that since ODMD made fraudulent
misrepresentations in May 2002.
The defendant is correct that this claim, for statute
of limitations purposes, accrued when all elements of the
claim are in place that the plaintiff could have brought
suit. Accordingly, the earliest the plaintiffs' fraud
claim accrued was when the plaintiffs' 60 day due diligence
period expired (as plaintiffs had an absolute right toterminate the contract up until that time), on August 20,
2001. Thus the plaintiffs' action is not time barred as it
was timely commenced
accrual.on JuIy 31, 2007, within six years of
Fra ud
The essential elements of a cause of action for fraud
are ' representation of a material fact, falsity, scienter,deception (reliance) and inj ury If New York Uni v., v.
Continental Ins. Co. , 87 NY2d 308, 318 (1995), quotingChannel Master Corp., v. Aluminum Ltd. Sales Corp. 4 NY2d
403, 407 (1958)). " In order to establish fraud, a plaintiffmust show ' a material misrepresentation of fact, knowledge
of its falsity, an intent to induce reliance, justifiablereliance by the plaintiff and damages'" Carbon Ca9ital Mgt.
, LLC v American Express Co. supra at 937; quotingEurycleia Partners, LP v. Seward & Kissel, LLP , 12 NY3d
553, 449 (2009)). "In an action to recover damages for
fraud, the plaintiff must prove a misrepresentation or a
material omission of fact which was false and known to be
false by defendant, made for the purpose of inducing theother party to rely upon it, justifiable reliance of the
other party on the misrepresentation or material omission,
and inj ury
. " (
Lama Holding Co. v. Smith Barney, Inc. , 88 NY2d413, 421 (1996); see also Ross v. Louise Wise Serv., Inc.8 NY3d 478, 488 (2007); Colasacco v. Robert E. Lawrence Real
Est ate - 68 AD 3 d 706 ( 2 nd Dept. 2009); Orlando v. Kukielka
40 AD 3d 829, 831 Dept., 2007)).
A third party alleging negligence against an
accountant, in the absence of contractual pri vi ty, must showa relationship so close as to approach that of privity. In
particular (1) the accountants must have been aware that
the financial reports were to be used for a particular
purpose or purposes; (2) in the furtherance of which a known
party or part es was intended to rely; and (3) there musthave been some conduct on the part of the accountants
linking them to the party or parties, which evinces the
accountant' s understanding of that party or parties'reliance'" Barrett v. Freifeld , 64 AD3d 736, 738 Dept.
2009), quoting Credit Alliance Corp., v. Arthur Andersen &Co. , 65 NY2d 536 551 (1985)). In order to establish
accounting fraud, the plaint ff must show representation of
material fact, falsity, scienter, reliance and damages"Barrett v. Freifeld supra). ODMD audited the
financial statements of the facilities and issued audited
reports regarding the facilities financial position, thus
that ODMD made a material representation is not in dispute.In addi t ion, ODMD failed to make a prima facie showing
that the representations in it' s audited reports that "our opinion; the financial statements referred to above
present fairly, in all material respects the financial
position of " were not also. Even if it had the conflictingaffidavi ts by the parties' experts present precludes summarydisposition of that issue (se 1136 Tenants' Corp v. Max
torhenberg & Co. 27 AD2d 830 (1st Dept. 1967); see alsoVelez v. Policastro , 1 AD3d 429, 431 Dept. 2003).
As to the issues of "due diligence and " justifiablereliance" it is well settled that (a) sophisticatedplaintiff cannot establish that it entered into an arms
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. UST Private
Equity Investors Fund , Inc., v. Salomon Smith Barney , 288
AD2d 87, Dept. 2001); see also Rotterdam Ventures,Inc.. v. Ernst & Young LLP 752 NYS2d 746, 748 Dept.
2002) . Where an experienced businessperson had the means
and opportunity to conduct their own investigation and
analysis, but failed to do so, they will not be heard to
complain they were misled by the seller (see Orlando v.
Kukielka supra; Curran , Cooney , Penney , Inc., v. Young &
Koomans, Inc. , 183 AD2d 742 Dept. 1992). "Where a party
has the means to discover the true nature of the transaction
by the exercise of ordinary intelligence and fails to makeuse of those means, he cannot claim such reasonable reliance
on defendant' s misrepresentations" Stuart Silver Assocs..
Baco Dev. Corp. , 245 AD2d 96, 98- 99 Dept. 1997). \\ (I) the facts represented are not matters peculiarly within the
party' s knowledge, and the other party has the meansavailable to him of knowing, by the exercise of ordinary
intelligence, the truth or the real quality of the subject
of the representation, he must make use of those means, orhe will not be heard to complain that he was induced toenter into the transaction by misrepresentations. DDJ
Mgt., LLC v. Rhone Group L. , 15 NY3d 147, 154 (2010),
quoting Danann Realty Corp.. v. Harris , 5 NY2d 317,
322 (1959)). But, a plaintiff may not be precluded from
claiming reliance on misrepresentations of facts peculiarly
within the other parties knowledge (see Tahini Invest..Ltd.. v. Bobrowsky, 99 AD2d 489, 490 Dept. 1984). Where
a plaintiff has taken reasonable steps to protect itself
against deception , it should not be denied recovery merely
because hindsight suggests that it might have been possible
to detect the fraud when it occurred. In particular where a
plaintiff has gone to the trouble to insist on a written
representation that certain facts are true, it will often be
justified in accepting that representation rather than
making its own inquiry. DDJ Mgt., LLC v. Rhone Group
supra at 154-155; see also Curran. Cooney. Penney.
Inc.. v. Young & Koomans. Inc. supra at 743- 744).
..
Although the defendant contends the plaintiffs,sophisticated purchasers, could not have justifiably relied
on ODMD' s reports, where as here they failed to conduct
reasonable or any due diligence. The plaintiffs, based upon
their arguments and the presented evidence that prior to and
after entering into the purchase agreement and continuing up
until closing, they requested, received and reviewed the
facilities financial records including ODMD' s independent
audited reports submitted to the NYS DOH, continued toperpetrate the fraud, which they had no independent method
of discovering the truth about, prior to taking possession
of the facilities in September 2002 as they were prohibited
from entering and operating the facility prior to the
closing, sufficiently raised triable issues as conducing
their "due diligence" and their justifiable reliance on thedefendant' s representations.
Whether a party could have ascertained the facts with
reasonable diligence so as to ne ate justifiable reliance is
a factual question" Jablonski v. Rapalje , 14 AD3d 484, 488
Dept. 2005), quoting Country World V. Imperial Frozen
Foods Co. , 186 AD2d 781, 782 Dept.. 1992)).
Here the evidence presented, shows that the plaintiffs
sophisticated purchasers" prior to entering into
negotiations obtained documents from the DOH which included
ODMD' s audited reports for 1998 and 1999 (and ODMD' s reports
submitted to DOH) , and received additional documents from
the sellers as to the facilities finances and occupancy upon
until the closing, which continued to perpetrate the fraud.Plaintiffs contend they had no independent method of
discovering the truth about the overbilling, prior to taking
possession of the facilities in September 2002 as they were
prohibited from entering and operating the facility prior to
the closing.
Accordingly, material issues of fact exist regardingthe plaintiffs' due diligence" and justifiable reliance"
on ODMD' s representations, purported independent
confirmations of the sellers' representations of the
financial status of the facilities. Defendant' s contentions
that had the plaintiffs inquired they would have been toldabout the true state fo the sellers finances and billing
procedures, just further raise factual issue which cannot be
determined on this motion.
As to scienter, a fraud claim is not actionable
without evidence that the misrepresentations were made with
intent to deceive. Guberman v. Rudder , 85 AD3d 683 684
s t Dept 2011) see Barrett v. Freifeld suprai Leno v.
DePasquale , 18 AD3d 514 Dept. 2005); Friedman v.
Anderson , 23 AD3d 163, 166 Dept. 2005); Channel Master
Corp., v Aluminum Ltd. Sales supra at 406-407)
. " . .
Here contrary to the defendant' s contentions triable
issues of fact exist as to ODMD' s intent to deceive the
plaintiffs or any other purchaser or third party by its
representations. ODMD submitted reports to the DOH which
contained the same representations as in the audited reports
tha t it knew or should have known became puBl?f'C records.Moreover, although it is not disputed that ODMD' s audited
reports for 1998 and 1999 were issued before the plaintiffs
began their negotiations with the sellers, questions exist
as to whether ODMD knew or was aware, before they issued
the audited reports of the facilities December 31, 2000
financial statements, that the facilities were up for sale
and whether the plaintiffs or other potential purchasers
would be provided with them. Especially since ODMD knew the
sellers were in negotiations to sell the facilities as
ODMD' s representatives made suggestions regarding items that
should be included in the Moreover, the branch of
defendant' s motion for summary judgment on the issue ofdamages, is denied. Justice Warshawsky s Certification Order
bifurcated this matier , specifically providing for expert
disclosure only after the determination of liability.Accordingly, contrary to the defendant' s contentions, thatissue is not ripe for determination.
DATED: June 28, 2012