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1.", ,

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. .

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Defendant' s Expert' s Affidavit in Support andExhibits. .

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Statement of Uncontested Material Facts pursuant toRule 19-a..............................................

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Affidavits, Affirmation in Opposition andExhibits. .

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Plaintiff' s Expert' s Affidavit in Opposition andExhibits. .

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............,......... 5Plaintiff' s Rule 19-a Statement........................

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............ 6Affirmation in Further Support and Exhibits... .

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Memorandum of Law in Support. . .

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Memorandum of Law inOpposition. .

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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