Blogs

Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: April 8, 2019

Contractual Disclaimers Barred Fraud Claim

On March 21, 2019, Justice Sherwood of the New York County Commercial Division issued a decision in 438 W. 20 St., LLC v. Bares, 2019 NY Slip Op. 30719(U), holding that contractual disclaimers barred a fraud claim, explaining:

A fraud claim requires proof by clear and convincing evidence as to each element of the claim. The convincing clarity requirement is relevant in a ruling on a motion for summary judgment land as such the judge must view the evidence presented through the prism of the substantive burden. A cause of action for fraud is comprised of [1] a representation of material fact, [2] the falsity of the representation, [3] knowledge by the party making the representation that it was false when made, [4] justifiable reliance by the plaintiff and resulting injury. To succeed on a summary judgment motion, defendants must do more than show that there arc gaps in plaintiffs proof- the defendant movant must make an affirmative showing that there is no triable issue of fact as to the merits.

As to the first and second elements of a fraud claim, defendants demonstrated that the contract bars the claim. The contract contains a purchaser representation, warranty and agreement that it has examined the Premises and is familiar with the physical condition thereof and that neither Seller nor the agents of Seller have made any verbal or written representations to Purchaser. Thus, plaintiff can neither show a misrepresentation nor refute defendants’ denial of any representation of a material facts or falsely of any representation. In fact, plaintiff admits defendants made no representations about any condition of the Premises. After plaintiffs inspection, Davis negotiated a reduction of the price and, in return, reaffirmed in a Supplemental Rider that Purchaser shall take title to the Premises in its as is condition. There can be no misrepresentation here because plaintiff entered into a contract with defendants that specifically disclaims liability for any representations made prior to closing (“[T}he acceptance of the Deed by Purchaser shall be deemed to be an acknowledgment by Purchaser that Seller has fully performed, discharged and complied with all of Seller’s obligations. representations. warranties, covenants and agreements hereunder, that Seller is discharged therefrom and that Seller shall have no further liability with respect thereto).

Defendants further argue, correctly, that the contract language in this case is specific enough to obviate any claim that misrepresentations were made. The contract states that: except as otherwise set forth in this contract, none of Seller’s covenants, representations. warranties or other obligations contained in this Contract shall survive Closing. It also contains a similarly worded merger clause.

Plaintiff however, argues that the allegedly misrepresented facts were peculiarly within the representors knowledge. Plaintiff’s claim arises out of representations of defendants and their agents that the Townhouse had been gut renovated with top of the line renovations.

None of these appear in the contract. As discussed above, representations of any kind are expressly disclaimed. Evidence of the misrepresentations alleged include disturbed asbestos in the walls. holes in the walls that were covered up with drywall and siding, carbon monoxide risks, air duel work that was cheaply done, joist defects in the roof, etc. Plaintiff argues that issues that are not easily verified without destructive testing may be found to be peculiarly within the representor’s knowledge, and as such, even a specific disclaimer in the contract would be insufficient to bar a fraud claim. Plaintiff cites Schooley v. Mannion (241 AD2d 677. 678 [3d Dept 1997]), where the court’s inquiry was limited to whether any viable cause of action can be gleaned from the complaint and Superior technical Resources Inc. v Lawson Software Inc., (17 Misc3d 1137[A], 851 NYS2d 74, 2007 NY Misc LEXIS 8053 [Sup Ct NY County 2007]). This is a motion for summary judgment and purchaser had the means available to him of knowing the truth or real quality of he representations. The CPLR 3211 (a)(7) standard applicable in Schooley and the exception discussed in Superior Technical Resources. Inc. do not apply.

The contract does not limit plaintiffs ability to inspect. Plaintiff does not put forth any evidence indicating that defendants refused more invasive inspection or made any affirmative representations about the structural health of the building. Plaintiff’s allegations do not reflect the convincing clarity required to avoid a grant of summary judgment. Moreover, the asserted misrepresentations are belied by the Contract, Rider and Supplemental Rider: The Rider states neither Seller nor the agents of Seller have made any representations to Purchaser: the Contract provides Purchaser represents it is fully aware of the physical condition and state of repair of the Premises and is entering into the contract based solely upon its inspection and not upon any representations given or made by Seller; and the Supplemental Rider recites Purchaser shall take title of the Premises in its as is condition.

Bares states, and David does not deny, that neither he nor anyone on his behalf interfered with the work of Davis’ inspector. The inspector did not report any restrictions on or interference with his work at the Premises. Additionally, Bares confirmed that he would have given his consent to have plaintiff perform whatever inspection Davis’ representatives might have chosen to perform at the Premises. Bares was never asked to give his consent to any further inspections.

As to the fourth element, defendants have shown that even if representations had been made. plaintiff could not have reasonably relied on them because the Supplemental Rider, as part of the contract, provides that the Purchaser has been provided access to conduct whatever inspections (both engineering and environmental) and other due diligence that the Purchaser deems necessary. Plaintiffs home inspector reported seventeen defects, including evidence of mold, moisture penetration, a need for exterior waterproofing. waterproofing, settlement that will cause deflections and floor sags, flame distortions and wall and ceiling cracks and concluded that it is not unusual for new purchasers to assume the risk of unknown, hidden defects in old buildings like this one. The Report also notes that the roof was poorly installed and will need to be re-sloped, that the rear extension is poorly heated, that the fireplaces with old brick flues arc considered unsafe, that the steel I-beam supporting the sidewalk is deteriorating and that walls have been, and walls were removed.

Armed with the Report, Davis was able to negotiate a $150,000 concession on the price of the Townhouse. Plaintiff was aware of all of the defects discovered by the home inspector and the risks it would be assuming when it determined to go through with the purchase. Further, plaintiff suspected that there may be underlying structural issues with the Townhouse, yet declined to investigate further as to those issues prior to closing. Under the doctrine of caveal emptor, the seller should not be responsible for the buyer’s failure to make use of the means of verification available to it.

Plaintiff attempts to avoid the risks he assumed by asserting that defendants actively concealed non-visible defects. As evidence, he submits two spreadsheets where defendant Kormilitsyna wrote, the building has to look like new construction and not show any structural issues. This statement is taken out of context.

The spreadsheets, labeled “Action Plan,” were prepared during a $1.3 million renovation project of the Premises in 2013. According to Ms. Kormilitsyna. the spreadsheets concerned priorities for performing certain work within the next week. The quoted statement not show any structural issues was intended to communicate to the contractor that she wasn’t going to take any shortcut. In her deposition, Ms. Kormilitsyna stated that the Townhouse was to be completely fixed given that she and Bares were spending more than a year of our lives and a small fortune to do if. Thomas Vail, the architect, confirmed that the Bares wanted the final product to be a new renovation and that he and the Bares wanted the house not to have structural issues.

Perri, plaintiffs inspector, when asked whether he saw any evidence of any concealed defects or other indiction that would suggest that the sellers, or any other entity, fraudulently tried to hide defects in the townhouse, replied simply “No.” The convincing clarity required to show active concealment simply is absent here.

Accordingly, plaintiffs cause of action alleging fraud must be dismissed as there are no material issues of fact sufficient to require a trial on the merits. Even if some such facts were shown. they do not rise to the clear and convincing evidence standard required.

(Internal quotations and citations omitted).

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements or rules. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client think you have been defrauded, or if someone has accused you or a client of defrauding them.

Click here to subscribe to this or another of Schlam Stone & Dolan’s blogs.

View posts