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Posted: March 17, 2015

Buyer’s Fraudulent Inducement Claim Survives Motion To Dismiss Despite Contract Provision Disclaiming Reliance On Seller’s Representations

On March 3, 2015, the First Department issued a decision in TIAA Global Investments, LLC v. One Astoria Square LLC, 2015 NY Slip Op. 01768, applying the “special facts doctrine” to deny a motion to dismiss a fraudulent inducement claim despite a provision in the parties’ real estate contract disclaiming reliance on representations by the seller.

In TIAA Global, the plaintiff entered into a contract with the defendant to purchase a 115-apartment residential building for $43 million. The contract of sale contained provisions stating that (1) the property was being sold “as is”; and (2) the “Purchaser is not relying . . . on any statements, promises, information or representations made or furnished by Seller . . . but rather is relying solely on its own expertise and on the expertise of its consultants and on the inspections and investigations Purchaser and its consultants has or will conduct.” Shortly before the closing, the buyer inquired about tenant complaints concerning issues with heating and the insulation of doors and windows in the building. A representative of the seller responded by email that the “windows and insulation” are “as per code and there is no excessive air penetration from the exterior of the building.” Later that day, the seller provided a letter from a mechanical contractor “stating that the problem plaintiff had inquired about related specifically to defective valves in PTAC mechanical units, and that all necessary repairs had been made.”

Following those representations, the sale closed. The buyer quickly discovered that the structural problems were far more serious than the seller had represented prior to the closing. The buyer then commenced an action against the seller, asserting, inter alia, causes of action for “fraudulent concealment, fraudulent misrepresentation, and simple fraud . . . based on defendants’ affirmatively stating, and encouraging [the contractor] to state, that the air infiltration issue was due to a discrete issue that had been fixed before the closing.” The seller moved to dismiss these claims arguing that the no-reliance clause the buyer’s contractual due diligence rights negated any claim of reasonable reliance on the seller’s representations. Justice Schweitzer of the New York County Commercial Division denied the motion. The First Department affirmed, in a decision by Justice Mazzarelli. The Court explained:

Defendants assert that . . . the fraud causes of action are unsustainable because the “as is” clause, coupled with the “no reliance” clause found in section 1.3, preclude plaintiff from claiming it was deceived by the Khan email, the letter from MSI, and other statements or omissions that defendants may have made to allegedly induce plaintiff to close. Indeed, a specific disclaimer of reliance on representations as to the condition of real property will ordinarily bar a fraud claim (Danann Realty Corp. v Harris, 5 NY2d 317, 320-321 [1959]). However, the Danann Court suggested that this is only the case where “the facts represented are not matters peculiarly within the representing 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.”

This “special facts doctrine” applies regardless of the level of sophistication of the parties . . . .

(Internal quotations and citations omitted) (emphasis added). The Court rejected the seller’s argument that in light of the buyer’s due diligence rights, the facts at issue were not “peculiarly within [their] knowledge,” finding that “it is impossible to determine at this stage of the proceedings whether it would truly have been practical for plaintiff, prior to taking possession of the building to do the requisite testing, some of it possibly destructive that would have been necessary to reveal the alleged defects. . . . Ultimately the issue is one for a trier of fact, perhaps after the presentation of expert testimony.”

In a dissenting opinion, Justice DeGrasse argued that the buyer did not qualify for the “special facts” rule “because the broad property investigations provision set forth under section 7.1 of the purchase agreement refutes any claim that information regarding the condition of the building was peculiarly within the sellers’ knowledge.” Justice DeGrasse noted that the buyer had not argued to the motion court that the defects could not have been detected through “destructive testing.” Rather, they had relied on an affidavit from an engineer who stated that the defects “could only be ascertained by destructive testing.”

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