Disclaimers of Reliance on Representations Concerning the Condition of a $6 Million Property Stand in the Way of Viable Fraud Claims

• Posted on: Apr 11 2019

On April 10, 2019, the Appellate Division, Second Department, reversed the denial of motions to dismiss fraud claims alleged in connection with the purchase and sale of a $6.2 million home in Harrison, New York. Comora v. Franklin, 2019 N.Y. Slip Op. 02671 (2d Dept. Apr. 10, 2019) (here). The decision addresses whether contractual disclaimers can preclude a fraudulent concealment claim. As readers of this Blog know, we recently addressed this issue here and here.

Under New York law, to recover damages for fraud, a “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 the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.” Lama Holding Co. v. Smith Barney, 88 N.Y.2d 413, 421 (1996); see also Hecker v. Paschke, 133 A.D.3d 713, 716 (2d Dept. 2015).  When the fraud involves an omission of material fact, it is actionable “only if the non-disclosing party has a duty to disclose.” Remington Rand Corp. v. Amsterdam-Rotterdam Bank, N.V., 68 F.3d 1478, 1483 (2d Cir. 1995).

A duty to disclose arises if “one party makes a partial or ambiguous statement that requires additional disclosure to avoid misleading the other party.” Id. (internal quotation marks omitted).  The existence of a special relationship between the plaintiff and defendant, such as a fiduciary relationship, also gives rise to a duty to disclose.  Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 178 (2011).  In addition, the “special facts” doctrine can trigger a duty to disclose.  Under this doctrine, a duty to disclose arises “‘where one party’s superior knowledge of essential facts renders a transaction without disclosure inherently unfair’ …” See P.T. Bank Central Asia v. ABN AMRO Bank N.V., 301 A.D.2d 373 (1st Dept. 2003).

In the context of real estate transactions, “New York adheres to the doctrine of caveat emptor and imposes no duty on the seller or the seller’s agent to disclose any information concerning the premises when the parties deal at arm’s length, unless there is some conduct on the part of the seller or the seller’s agent which constitutes active concealment.” Hecker, 133 A.D.3d at 716 (internal quotation marks omitted); see also Jablonski v. Rapalje, 14 A.D.3d 484, 485 (2d Dept. 2005). “If however, some conduct (i.e., more than mere silence) on the part of the seller rises to the level of active concealment, a seller may have a duty to disclose information concerning the property.” Hecker, 133 A.D.3d at 716 (internal quotation marks omitted); see also Jablonski, 14 A.D.3d at 485. “To maintain a cause of action to recover damages for active concealment, the plaintiff must show, in effect, that the seller or the seller’s agents thwarted the plaintiff’s efforts to fulfill his [or her] responsibilities fixed by the doctrine of caveat emptor.” Jablonski, 14 A.D.3d at 485.

Apart from the foregoing, a fraud claim will be dismissed where: (1) a party’s disclaimer of reliance 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). In the context of a real estate transaction, a specific disclaimer of reliance on representations as to the condition of real property will generally bar related fraud-based claims. Danann Realty, supra. “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.

Comora v. Franklin

Background

[Ed. Note: The facts set forth below originate from the motion court’s decision on the motions to dismiss.]

Comora arose from the plaintiffs’ purchase of a $6.2 million home in Harrison, New York from defendant Martin Franklin (“Franklin”), on November 27, 2013. Franklin’s sister, defendant Caroline Freidfertig (“Freidfertig” and, together with Franklin, the “Individual Defendnats”), was his real estate agent in the transaction and the alleged caretaker of the home prior to the sale; no one had been living at the home immediately prior to the sale. Freidfertig is employed by defendants JBF 2, LLC, doing business as Julia B. Fee Sotheby’s International Realty, and for JBF Holdings, LLC, doing business as Julia B. Fee Sotheby’s International Realty (“Sotheby’s”). The home featured an indoor pool wing that included a large swimming pool and hot tub and was described in the real estate listing prepared by Sotheby’s as being “humidity controlled.”

In March 2013, before the property was listed for sale, non-party Belfor Property Restoration (“Belfor”) had been hired to perform a mold remediation project in the indoor pool wing at a cost of more than $1 million. The project included replacing the ceiling and attic area as a result of it being compromised by significant mold growth. As part of the work, Belfor agreed to monitor the humidity alarm located in the pool area that would trigger when the humidity was too high.

On April 18, 2013, after Belfor completed the mold remediation, Franklin hired non-party Bohlander Home Inspection, Inc. (“Bohlander”) to inspect the remediation work and conduct mold clearance testing. Bohlander issued a letter/report, on April 18, 2013, in which it confirmed that the remediation was successful. However, Bohlander expressly warned that the mold growth could return if certain specified steps and conditions were not followed.

Thereafter, on May 20, 2013, Freidfertig listed the home for sale. Freidfertig did not include any reference to the mold remediation project in the listing.

In September 2013, plaintiffs met with Freidfertig to view the home. Soon thereafter, the parties reached an agreement with regard to the sale of the home. Prior to entering into the contract of sale, plaintiffs hired non-party ENCO Home Inspection, LLC d/b/a Housemaster (“Housemaster”) to inspect the premises, including the indoor pool wing. On October 7, 2013, Housemaster inspected the pool house wing, the HVAC system and “other related systems in the pool area.” Housemaster reported “no visual evidence of or musty odors associated with fungi during the inspection, and there were no elevated moisture levels to indicate fungal proliferation.”

On October 11, 2013, the parties signed the contract of sale. Plaintiffs ordered a title report but it did not reflect the mold remediation work.

Plaintiffs purchased the property on November 23, 2013, and shortly after closing, plaintiffs turned on the swimming pool and the humidity alarm sounded. Plaintiffs immediately called Franklin about the alarm; Franklin told them to contact Belfor.

Belfor visited the property several times attempting to resolve the humidity issue. It was during this time that plaintiffs allegedly learned for the first time about the prior mold problem, and the remediation project.

In January 2014, mold began appearing on the surfaces of the pool wing. Plaintiffs hired Housemaster, on January 13, 2014, for a limited inspection of the pool area. Housemaster found that the attic area above the pool area was “saturated with moisture” and that the humidistat and the air registers associated with the humidity system were incorrectly placed, causing skewed humidity percentages and excessive moisture. Plaintiffs sought a second opinion, which confirmed Housemaster’s conclusion.

In Spring 2014, plaintiffs hired non-party Five Boro Mold Removal to remove the mold that spread throughout the pool house wing. Ultimately, plaintiffs elected to redo the indoor pool area at a cost of approximately $1,114,000.00.

Plaintiffs commenced the action, alleging nine causes of action based in fraud against all defendants with the exception of the first cause of action which was alleged only against Franklin. Plaintiffs alleged that defendants were liable for fraud because they had particular knowledge of the humidity and mold problems in the indoor pool wing and never informed plaintiffs of same. Instead, plaintiffs asserted that Franklin and Freidfertig actively concealed these issues from plaintiffs until months after plaintiffs had purchased the home. Plaintiffs further alleged that Sotheby’s was liable on the basis of respondeat superior/vicarious liability given the agency/employment relationship with Freidfertig.

Defendants moved to dismiss the complaint. The motion court denied the Individual Defendants’ motion with regard to the first cause of action and the second and fourth through ninth causes of action. The motion court denied Freidfertig’s motion to dismiss, or in the alternative for summary judgment, the second and fourth through ninth causes of action insofar as asserted against her individually.

Defendants appealed.

The Second Department’s Decision

The Second Department reversed the motion court’s denial of the motions.

The Court held that the motions should have been granted because plaintiffs could not satisfy the reliance element of their fraud-based claims due to the presence of specific disclaimers in the contract for sale. These disclaimers, noted the Court, provided that plaintiffs were “‘fully aware of the physical condition and state of repair of the Premises’” because of “‘[their] own inspection and investigation thereof’” and that they entered into the contract “‘solely upon such inspection and investigation and not upon any information . . . or representations . . . given or made by Seller or its representatives.’” Slip Op. at *2. Citing to Danann Realty, the Court held that these specific disclaimers as to the condition of the home barred plaintiffs’ fraud-based claims. Id.

“Accordingly,” concluded the Court, the motion court “should have granted that branch of the individual defendants’ motion which was pursuant to CPLR 3211(a) to dismiss the first cause of action, which was asserted against Franklin only, and those branches of the defendants’ separate motions which were pursuant to CPLR 3211(a) to dismiss the second and fourth through ninth causes of action insofar as asserted against each of them.” Id. at **2-3.

Takeaway

As noted, in a real estate transaction, the law does not impose a duty on the seller or the seller’s agent to disclose information about the premises when the parties deal at arm’s length, unless the seller or the seller’s agent actively conceal material information. Instead, the buyer has a duty to satisfy himself/herself as to the quality of his/her bargain. See London v. Courduff, 141 A.D.2d 803, 804 (2d Dept. 1988).

In Comora, the Court did not address whether the caveat emptor doctrine barred the plaintiffs’ fraud claims because they could not avoid the consequences of their disclaimers. These disclaimers were specific and addressed their knowledge of the physical condition and state of repair of the home. As the Court of Appeals observed in Danann Realty: “Such … specific disclaimer[s] destroy[] the allegations in the complaint that the agreement was executed in reliance upon contrary oral representations.” 5 N.Y.2d at 320-21.