151 A.D.2d 112 | N.Y. App. Div. | 1989
OPINION OF THE COURT
By contract dated April 29, 1985 and closing documents dated October 17, 1985, plaintiff purchased from defendant partnership, for $3,850,000, 17,922 shares of stock allocated to 31 tenant-occupied apartments in a residential cooperative corporation whose conversion defendant had sponsored and whose operations it controlled both before and after the transaction. By letter dated December 31, 1985, the co-op’s managing agent advised the tenant-shareholders that the coop Board had decided to impose a $2.66 per share one-time assessment in order to cover an operating deficit of $124,000 for the year ending December 31, 1985, and to increase the coop’s maintenance charge from $18.30 to $25.60 per share per year in order to avoid "increasing deficit build-ups” in the upcoming year and to cover "amounts not budgeted and collected for past years”. The letter also indicated that the coop actually fared better than expected in 1985 in that the budget for that year had forecast a deficit of $200,000, and that a one-time assessment of the type now being imposed had been under consideration by the Board for a year. Plaintiff sued.
The complaint alleges that throughout the course of their negotiations in early 1985, defendant told plaintiff that the coop was in good financial condition; that its income from maintenance payments, recently increased on January 1, 1985 from $16.30 to $18.30 per share, was sufficient to meet ordinary operating costs as well as the additional cost attributable to the debt service on a $500,000 bank loan the co-op had taken out in December 1984 to make repairs to the exterior brickwork of the building; that defendant had no plans to impose any assessments or further increases in maintenance and knew of no circumstances that would make such an assessment or increase necessary; that a reserve fund of $300,000, established in the spring of 1983 when the co-op took title to the building and commenced operations, and
In fact, plaintiff alleges, from its very inception, the co-op’s income was never sufficient to meet its operating expenses; that deficit spending was habitual and actually budgeted for by defendant; that while defendant always understood that a large increase in maintenance was necessary and inevitable, it resolutely "held the line” on maintenance for as long as possible as part of a scheme to induce an investor, such as plaintiff, into purchasing a large block of shares; that the 1983 and 1984 operating deficits were funded by depleting the $300,000 reserve fund earmarked for major capital improvements; and that defendant thereafter began to pay for the coop’s operating expenses with the proceeds of the $500,000 loan also earmarked for major capital improvements.
The action demands money damages of $2,000,000 on various theories, including, insofar as pertinent, fraud, violation of the Martin Act, negligent misrepresentations, breach of a fiduciary duty of disclosure, breach of the warranty against plans to impose an assessment or to increase maintenance, breach of the warranty against material omissions or misrepresentations in the offering statement, and breach of the covenant of good faith and fair dealing implied in the contract. A motion by defendant for summary judgment left standing the causes of action for fraud, negligent misrepresentations, breach of fiduciary duty, and breach of the implied covenant, and defendant appealed. Plaintiff cross-appealed from the dismissal of the cause of action for breach of the warranty against material omissions or misrepresentations in the offering statement, the ninth cause of action, which cross
Defendant argues that any duty it may have owed plaintiff to inform him of the co-op’s finances, including its deficits and the depletion of the reserve fund, was satisfied by its making available to plaintiff, prior to contract execution, the co-op’s audited financial statement for the period May 1, 1983, when the co-op began operations, to December 31, 1984. This financial statement was made part of the eleventh amendment to the offering statement, and the eleventh amendment was made part of the written contract. If additional financial information was desired, defendant argues, plaintiff, a sophisticated real estate investor, should have undertaken his own investigation of the co-op’s financial affairs. That plaintiff understood this—that he in fact relied on the financial statement, and on his own judgment and experience, and not on any oral assurances, for purposes of ascertaining the financial facts he deemed material—is conclusively demonstrated, defendant argues, by a clause in the contract wherein plaintiff acknowledged that he had examined and was satisfied with the documentation provided him concerning the co-op’s conversion, operation and management, including, in particular, its financial statements. IAS, while accepting that plaintiff had specifically disclaimed reliance on any oral representations concerning the co-op’s finances (see, Danaan Realty Corp. v Harris, 5 NY2d 317), nevertheless refused to dismiss the cause of action for fraud because, it held, an issue of fact existed as to whether, and to what extent, the co-op’s finances were peculiarly within defendant’s knowledge. Given such an issue, IAS ruled, even the specific disclaimer clause invoked by defendant was ineffective to preclude evidence of oral misrepresentations (citing Ward v Hanley, 130 AD2d 742 [2d Dept]; see also, Tahini Invs. v Bobrowsky, 99 AD2d 489 [2d Dept]; Hi Tor Indus. Park v Chemical Bank, 114 AD2d 838 [2d Dept]; Yurish v Sportini, 123 AD2d 760 [2d Dept]).
While we agree with IAS that the fraud cause of action should not be dismissed, we disagree that the alleged oral misrepresentations are admissible to prove the fraud (compare, Danaan Realty Corp. v Harris, supra [alleged oral misrepresentations concerning the operating expenses of a building held barred by a specific disclaimer clause without passing
Quite apart from the relationship of the parties (i.e., defendant’s supposed superior knowledge of the co-op’s affairs and plaintiff’s supposed sophistication as a real estate investor), defendant was under a continuing obligation, as sponsor of the conversion, to file amendments to the offering statement disclosing all material changes of fact affecting the co-op (13 NYCRR 17.5 [a] [1], [2]; see also, General Business Law § 352-e [1] [b]; 13 NYCRR 17.1 [b]). It could be argued that this statutory obligation to the investing public was written into the parties’ private contract through the clause warranting against any material omissions or misrepresentations in the offering statement and its 11 amendments, i.e., that defendant agreed that plaintiff should have what is, in effect, a private right of action under the Martin Act in the event the warranty proved false (see, 60 NY Jur 2d, Fraud and Deceit, § 94, at 574 ["One who expressly contracts that he will disclose all relevant facts is, of course, bound to do so; his duty arises, not under the law of fraud, but ex contractu, and failure to perform it vitiates the transaction regardless of whether or not he intended to deceive.”]). This is indeed the gist of plaintiff’s ninth cause of action for breach of warranty, dismissed by IAS on the ground that the warranty alleged therein, like all of the other seller warranties in the contract, was by the terms of the contract not to survive the closing. Plaintiff, however, now comes' forward on the appeal with proof purporting to show that the copy of the contract submitted to IAS inadvertently omitted critical language excepting
However, taking note that the requisite motion to renew is pending before IAS, we point out that it remains an open question whether the Martin Act was written into the contract via the warranty against material omissions and misrepresentations, and, if so, whether defendant’s disclosure obligations under the Martin Act were satisfied by incorporating into the eleventh amendment the financial statement shown to plaintiff. It could be that a narrative statement plainly explaining the co-op’s deficits and use of the reserve fund to cover the deficits should also have been included in the eleventh amendment. Should this be so, and plaintiff prevail on the ninth cause of action for breach of warranty, the question of whether he was justified in relying on anything defendant said orally or in writing would become academic. Plaintiff would be entitled to relief merely by virtue of the fact that the offering statement was not up to Martin Act standards. It thus makes sense to focus attention first on the ninth cause of action. No less damages are claimed thereunder than under the first cause of action for fraud.
Meanwhile, absent an appeal by plaintiff from the dismissal of the ninth cause of action, we should assume, in defendant’s favor, that the Martin Act imposed no duty on it to tell the investing public, in so many words, that the co-op was operating at a deficit and using funds earmarked for capital improvements to pay for everyday expenses. But even if there were no such duty, the question remains whether the deficit and depletion of the reserve fund were facts that should have been discerned, or at least suspected, by a reasonably prudent investor from a perusal of the financial statement. And if not, whether the duty was on defendant to reveal such facts rather than on plaintiff to investigate them.
The financial statement, characterized by IAS as a “complexity”, first reports in á “Notes and Comments” section that a “reserve fund” in the amount of $302,873 was established upon commencement of the co-op’s operations. It then
We also leave it to a jury to decide whether the financial statement was adequate to inform plaintiff of the fact that the co-op’s income from maintenance was not sufficient to cover the cost of its ordinary operations and fixed expenses. Under the schedule entitled "Application of Maintenance from Tenant-Stockholders” for the year 1984, the financial statement reports that the co-op’s "cash requirements” exceeded its "maintenance” by "$2.1910” per share. It is a fact that effective January 1, 1985 the co-op increased its maintenance by $2 per share, from $16.30 to $18.30. Given this increase, and the fact, which plaintiff had reason to believe from the financial statement, that a large payment was made to the brickwork contractor in 1984 before the proceeds of the $500,000 loan had become available, plaintiff might have supposed, or so a jury could find, that a modest deficit of $2.19 per share was temporary and remediable without an increase in maintenance, or at least one not so large as the $7.30 increase that was imposed. In other words, a jury could conclude that the financial statement, far from arousing suspicions, was deceptively suggestive of financial health, if not actually false in any particular respect, and lulled plaintiff into a false sense of security that all was well with the co-op. Should the financial statement be viewed in this way, plaintiff would have a classic case of fraud by concealment (see, Downey v Finucane, 205 NY
Apart from the fraud cause of action, defendant also appeals from that part of IAS’s order which denied its motion for summary judgment dismissing the fourth cause of action for negligent misrepresentations and the fifth cause of action for breach of fiduciary duty. Fairly construed, both these causes of action omit the element of a deceitful intent on defendant’s part and substitute therefor the existence of a fiduciary relationship of trust and confidence. Both should have been dismissed. Purportedly based on the fact of deception and defendant’s position as sponsor of the conversion, to sustain them would be, in effect, to recognize a private right of action under the Martin Act contrary to case law (CPC Intl, v McKesson Corp., 70 NY2d 268, 275-278). We do not mean to suggest that in dealing with plaintiff, defendant’s duty, if any, to volunteer information concerning the co-op was no greater than that a reselling tenant-shareholder with no inside information of the co-op’s affairs, and that defendant’s position as sponsor of the conversion is irrelevant to the question of whether it dealt honestly with plaintiff. The relationship of the parties, which includes plaintiff’s sophistication as a real estate investor as well as defendant’s peculiar and superior knowledge of the co-op’s operations, is simply an attending circumstance to be considered by the fact finder in determining whether the information supplied, or not supplied, in the offering statement was deceptive. Defendant’s position as sponsor is therefore relevant to plaintiff’s cause of action for fraud (see, Rothmiller v Stein, 143 NY 581, 594).
Finally, under the tenth cause of action for "breach of implied covenant of good faith and fair dealing”, plaintiff argues that throughout the six-month period between the signing of the contract and its closing, defendant was under a continuing duty to disclose any facts of which it became aware inconsistent with its earlier representations that the co-op was in good financial condition. This very same duty to disclose is clearly entailed by plaintiff’s cause of action for breach of the warranty against material omissions and misrepresentations in that such warranty was expressly made to survive up to the closing, if not beyond. Similarly, to the extent plaintiff’s cause of action for fraud is based on a theory of concealment, we see no reason why it would not entail facts learned by defendant between the signing and closing of the contract and not disclosed. Neither does plaintiff, whose fraud cause of action
Accordingly, the order of the Supreme Court, New York County (Harold Baer, Jr., J.), entered June 30, 1989, which, inter alia, denied defendants’ motion for summary judgment dismissing the fourth, fifth and tenth causes of action, should be modified, on the law, to grant the motion with respect to such causes of action, and otherwise affirmed, without costs.
Sullivan, J. P., Carro, Asch and Milonas, JJ., concur.
Order, Supreme Court, New York County, entered on June 30, 1989, unanimously modified, on the law, to grant defendants’ motion to dismiss with respect to the fourth, fifth and tenth causes of action, and otherwise affirmed, without costs and without disbursements.