Contractual Disclaimers Did Not Preclude a Fraudulent Inducement Claim Because They Did Not Specifically Address the Subject of the Alleged Misrepresentation

• Posted on: Mar 15 2019

On March 14, 2019, the Appellate Division, First Department, unanimously affirmed the denial of a summary judgment motion seeking to dismiss a fraudulent inducement claim alleged in connection with the purchase of a mixed-use property on Union Avenue in the Bronx, New York (the “Subject Property”). Union Ave. Estates, LLC v. Garsan Realty Inc., 2019 N.Y. Slip Op. 01827 (1st Dept. Mar. 14, 2019) (here). The decision, though short and concise, addresses a couple of principles ripe for discussion in today’s post: whether contractual disclaimers can preclude a fraudulent inducement claim; and whether the plaintiff justifiably relied on the representations and warranties supporting the fraudulent inducement claim.

Background

[Ed. Note: Since the First Department’s decision does not contain a factual recitation of the case, the factual background comes from the papers filed in connection with the motion for summary judgment.]

On February 18, 2015, YMY Acquisitions LLC (“YMY”) entered into a written contract of sale to purchase the Subject Property from Defendants (the “Contract” or “Contract of Sale”). In April 2015, YMY assigned the Contract to Plaintiff. On April 27, 2015, Defendants conveyed the Property to Plaintiff by a bargain and sale deed, thereby vesting Plaintiff with title to the Property.

Pursuant to various paragraphs of the rider to the Contract of Sale, Defendants provided a rent roll for the Subject Property and copies of all leases affecting the Subject Property. Defendants allegedly represented and warranted that the rent roll was true and accurate as of February 18, 2015, and correctly reflected the expiration dates of each of the leases affecting the Subject Property.

According to Plaintiff, Defendants represented and warranted that the leases of two commercial tenants (the “Commercial Tenants”) had expired and, therefore, the Commercial Tenants were occupying the Subject Property on a month-to-month basis.

The rider to the Contract also required Defendants to deliver all leases, files, and records affecting the Subject Property upon closing. Pursuant to the requirement, Defendants delivered leases in their possession demonstrating that the leases of the Commercial Tenants had expired in July 2014.

Also, at the closing, Defendants allegedly provided Plaintiff with a rent arrears report containing further representations that the leases of the Commercial Tenants had expired in July 2014 and that the Commercial Tenants were therefore month-to-month tenants.

Subsequent to the closing, Plaintiff sought to evict the Commercial Tenants from the Subject Property. Plaintiff learned, however, that the Commercial Tenants had extended their leases until 2024. As such, the Commercial Tenants were not month-to-month tenants.

Plaintiff commenced the action on October 23, 2015. During discovery, Defendants moved for summary judgment.

Among other things, Defendants argued that the fraudulent inducement claim was barred by a merger clause and “as is” disclaimer clauses in the Contract of Sale and related documents. The Motion Court denied the motion. Defendants appealed.

The First Department’s Decision

Whether Contractual Disclaimers Can Preclude A Fraudulent Inducement Claim

In New York, a party’s disclaimer of reliance cannot preclude a fraudulent inducement claim unless: (1) the disclaimer is specific to the fact alleged to be misrepresented or omitted; and (2) the alleged misrepresentation or omission does not concern facts peculiarly within the knowledge of the non-moving party. Basis Yield Alpha Fund [Master] v. Goldman Sachs Group, Inc., 115 A.D.3d 128, 137 (1st Dept. 2014). See also Danann Realty Corp. v Harris, 5 N.Y.2d 317, 323 (1959); MBIA Ins. Corp. v. Merrill Lynch, 81 A.D.3d 419 (1st Dept. 2011). “Accordingly, only where a written contract contains a specific disclaimer of responsibility for extraneous representations, that is, a provision that the parties are not bound by or relying upon representations or omissions as to the specific matter, is a plaintiff precluded from later claiming fraud on the ground of a prior misrepresentation as to the specific matter.” Basis Yield, 115 A.D.3d at 137.

In Union Ave., the disclaimer at issue pertained to a merger clause and “as is” provisions in various documents related to the purchase of the Subject Property. The Court held that these provisions were “not sufficiently specific to preclude the claim that defendants fraudulently induced plaintiff to purchase the property by misrepresenting the status of the commercial tenants’ leases.” Slip Op. at *1. The Court explained that “[n]one of the provisions relied upon by defendants specifically disclaim any warranties about the status of commercial tenants’ leases, or indeed of any leases.” Id.

Whether Union Ave. Justifiably Relied on the Alleged Representations and Warranties

As a general matter, the term “justifiable reliance” refers to the extent to which a person can be found to have properly relied on the representations of another. As this Blog has noted on several occasions, to determine whether the plaintiff justifiably relied on a representation, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” Curran, Cooney, Penney v. Young & Koomans, 183 A.D.2d 742, 743) (2d Dept. 1992) (“if the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available 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, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.”) (citation and internal quotation marks omitted). See also Danann Realty, 5 N.Y.2d at 322; Gutkin v. Siegal, 85 A.D.3d 687, 688 (1st Dept. 2011) (citation and internal quotation marks omitted).

Determining whether a plaintiff justifiably relied on a misrepresentation, however, is “always nettlesome” because it is so fact-intensive. DDJ Mgt., LLC v. Rhone Group L.L.C., 15 NY3d 147, 155 (2010) (internal quotation marks omitted). The inquiry “involves a mixed question of law and fact, and, where it does not conclusively appear that a plaintiff had knowledge of facts from which the alleged fraud might be reasonably inferred, the cause of action should not be disposed of summarily….”  Berman v. Holland & Knight, LLP, 156 AD3d 429, 430 (1st Dept. 2017). “Instead, the question is one for the trier of-fact.” Id. See also Sargiss v Magarelli, 12 N.Y.3d 527, 532 (2009).

Moreover, 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, 15 N.Y.3d at 154); Lunal Realty, LLC v. DiSanto Realty, LLC, 88 A.D.3d 661, 664 (2d Dept. 2011).

In Union Ave., the Court found that it was an issue of fact “[w]hether plaintiff’s reliance on defendants’ alleged misrepresentations – that the commercial tenants were month-to-month tenants and that their respective leases expired on July 31, 2014 – was reasonable or whether due diligence would have revealed the truth….” Id.

Takeaway

Although brief in length, Union Ave. is notable for its reiteration of the law concerning contractual disclaimers and fraudulent inducement claims. As the Court observed, contractual disclaimers will not preclude a fraudulent inducement claim unless the disclaimers specifically address the subject of the alleged misrepresentation.  In Union Ave., the disclaimers relied upon by the defendants were not specific enough to preclude the fraudulent inducement claim.