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Limpit Acquisition, LLC v. Federal Finance Group, Inc.

2006 WL 288076 (U.S. Dist. Ct. N.J 2006)

FRAUD; DUE DILIGENCE—The fact that a party conducted a due diligence investigation does not mean that it relied on its own investigation; that is a factual question to be answered by a jury.

An investor purchased fifteen promissory notes and underlying mortgages from another company. It then sued the seller, alleging that the seller’s attorney made material misrepresentations about some of the mortgages during the course of the transaction. The suit was for fraud, breach of contract, and breach of oral representations. The seller moved for summary judgment on the fraud claim, which was denied by the lower court. In order to prevail on a summary judgment motion, a moving party must show that, as a matter of law, there is no genuine issue of material fact. The elements of a fraud claim are: (a) material misrepresentation of a presently existing or past fact; (b) knowledge or belief by the defendant that it is false; (c) intention to rely on the representation; (d) reasonable reliance; and (e) resulting damages. The seller argued that the buyer could not have reasonably relied on any alleged misrepresentation. It claimed that the “conscious ignorance” rule applied, but the seller did not demonstrate if it applied in New Jersey, and, if it did, how to apply it in the case. The seller also claimed that because the investor conducted a due diligence investigation, it should have been deemed to have knowledge of whatever could have been discovered by a reasonable investigation. The Court found that the seller misinterpreted New Jersey law. It noted that, in New Jersey, a party that conducts an investigation and relies on such investigation cannot be deemed to rely on an alleged misrepresentation. However, in New Jersey, the fact that a party conducted an investigation does not mean that it relied on the results of the investigation. That is a factual issue that cannot be resolved on a summary judgment motion. Lastly, the Court rejected, out of hand, the seller’s argument that the investor could not claim reliance on misrepresentations when it was represented by counsel during the course of the transaction.

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