Fraud Claims Dismissed Based on the “As Is, Where Is, and With All Faults” Contractual Provision
November 18, 2021
Nobody likes fraud claims asserted against them. Thankfully for defendants, fraud claims are notoriously difficult to prove, and defendants often try to have these claims dismissed at the pleading stage.
An express disclaimer in a contract is often a popular avenue for litigants facing a fraud claim to move for dismissal. A recent Commercial Division case, Arco Acquisitions, LLC, v Tiffany Plaza LLC et al. is a good example.
In Arco, plaintiff entered into an agreement to purchase commercial real property from defendants Tiffany Plaza LLC and 1075 Farmingville LLC (the “Defendants” or “Sellers”) (the “Agreement”). The Sellers of the property provided plaintiff with tenant-estoppel certificates and a certified rent roll detailing, inter alia, rents, taxes and arrears. The documents did not show that any particular tenants were in arrears. After the parties’ closing, however, plaintiff discovered that two tenants were unable to pay their monthly rent. The lawsuit ensued.
In April 2021, plaintiff commenced this litigation for fraud, aiding and abetting fraud, and piercing the corporate veil. Plaintiff alleged that that the rent roll and estoppel certificates were fraudulent and that the Sellers misrepresented the rent roll and obtained false estoppel certificates “to inflate the rent roll and increase the value of the property.”
Defendants moved to dismiss, relying for the most part on the express “As Is, Where Is, and With All Faults” provision of the parties’ Agreement. Under this provision, the parties agreed that plaintiff was purchasing the property in its existing condition, and that the Seller had no obligation to determine or correct any facts, circumstances, conditions or defects, or to compensate the purchaser for such facts and circumstances. In fact, the Sellers specifically negotiated for the “assumption by Purchaser of all responsibility to investigate the Property, Laws and Regulations, Rights, Facts, Condition, Leases, Open Permits and Violations and of all risk of adverse conditions existing on the date of this Agreement,” and structured the Agreement in consideration of these assumptions.
Under this provision, the parties also agreed that:
“Purchaser has, as of the date hereof, undertaken all such investigations and review of the Property, Laws and Regulations, Rights, Facts, Condition, Leases, Open Permits, Violations or Tenancies, as Purchaser deems necessary or appropriate under the circumstances as to the status of the Property and based upon this Agreement, Purchaser is and will be relying strictly and solely upon such inspections and examinations and the advice and counsel of its own consultants, agents, legal counsel and officers, and . . . Purchaser assumes the full risk of any loss or damage occasioned by any fact, circumstance, condition or defect existing on the date of this Agreement and pertaining to this Property.”
The Arco Court cited clear precedent on this topic. When a “party specifically disclaims reliance upon a representation in a contract, that party cannot, in a subsequent action for fraud, assert it was fraudulently induced to enter into the contract by the very representation it has disclaimed” (Grumman Allied Industries, Inc. and Grumman Corporation, v Rohr Industries, Inc., 748 F2d 729 [2d Cir 1984]; citing Danann Realty Corp. v Harris, 5 NY2d 317, 323 ). In Grumman Allied, the Second Circuit held that the specific disclaimed provision barred plaintiff’s misrepresentation claim.
In Arco, Suffolk County Commercial Division Justice Elizabeth Hazlitt Emerson opined that fraud claims are dismissed when disclaimer provisions are “sufficiently specific” to match the substance of the alleged misrepresentation. Justice Emerson noted, however, that the specificity requirement is more relaxed when the agreement is entered into by sophisticated business parties.
In determining that plaintiff’s reliance was not justified, the court considered both the sophistication of the parties involved in the transaction and the fact that plaintiff’s allegations tracked the specific language used in the disclaimer, which included “leases” and “tenancies.” The court concluded that “to hold otherwise would be to say that it is impossible for two businessmen dealing at arm’s length to agree that the buyer is not buying in reliance on any representations of the seller as to a particular fact.”
Litigants: when entering into a contract, carefully review the disclaimers container therein because they may preclude you from asserting certain claims in the future.
Practitioners: courts consider a large array of factors, including the sophistication and expertise of the parties, the arm’s-length nature of the negotiations, and the plain language of the agreement in determining motions to dismiss fraud claims based on various disclaimer provisions, such as the ones present in the Arco case. Therefore, you must carefully review the provisions, assess your client’s likelihood of success on the motion, and advise your client accordingly.