TIAA Global Investments, LLC v. One Astoria Square LLC
7 N.Y.S.3d 1, 127 A.D.3d 75 (2015)
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Rule of Law:
Even when a real estate contract contains 'as is' and 'no reliance' clauses, a purchaser may still pursue fraud claims if the seller actively misrepresents material facts about latent defects peculiarly within its knowledge, and these defects were not reasonably discoverable by the purchaser through ordinary due diligence.
Facts:
- On or about January 13, 2011, TIAA Global Investments, LLC (plaintiff) and One Astoria Square LLC (seller) entered into a contract for plaintiff to purchase a 115-apartment residential building for $43,000,000.
- The agreement included 'as is, where is, with all faults' and 'no reliance' clauses, but specified that certain representations and warranties in Article XIII (e.g., no pending lawsuits, no tenant claims, complete property documents) would survive closing.
- The contract allowed plaintiff to perform due diligence, and plaintiff's engineers identified approximately $620,700 in immediate repair needs, leading to a purchase price reduction and a $219,800 escrow for these specific issues.
- On February 28, 2011, prior to closing, plaintiff received a letter from 35 tenants, dated January 26, 2011, complaining of excessive heating bills, significant air infiltration, and cold air, rain, or snow entering their apartments due to perceived insulation problems.
- On the morning of March 1, 2011, plaintiff inquired with Shibber Khan (seller's principal) about the tenant complaints. Khan responded by email stating everything was 'per code' with 'no excessive air penetration' and provided a letter from Mechanical Services, Inc. (MSI) claiming the problem was defective PTAC valves that had been repaired.
- After taking control of the building, plaintiff discovered severe, latent construction defects, including a complete lack of insulation, improper vertical wall connections, and significant fire code violations, and learned of undisclosed prior tenant complaints and seller's promises of rent abatements.
Procedural Posture:
- TIAA Global Investments, LLC commenced an action against One Astoria Square LLC, The Criterion Group LLC, and Shibber Khan in Supreme Court, New York County (trial court) in or about August 2012.
- Plaintiff asserted causes of action for breach of contract, fraudulent concealment, fraudulent misrepresentation, simple fraud, and corporate veil piercing/successor liability.
- Defendants moved to dismiss the complaint pursuant to CPLR 3211 (a) (1), (5), and (7), arguing the claims were barred by the merger doctrine, 'as is' clause, contractual statute of limitations, and accord and satisfaction, and that fraud claims were duplicative or lacked reasonable reliance.
- The Supreme Court, New York County (Melvin L. Schweitzer, J.) denied defendants' motion in its entirety, finding latent defects negated the merger doctrine, equitable tolling applied to the limitations period, and fraud/corporate veil piercing claims were sufficiently pleaded.
- Defendants (appellants: One Astoria Square LLC, Shibber Khan, The Criterion Group LLC) appealed the Supreme Court's order to the Supreme Court, Appellate Division, First Department (intermediate appellate court).
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Issue:
Does a real estate contract's 'no reliance' clause and broad due diligence rights preclude a purchaser's fraud claims when the seller allegedly made active misrepresentations about latent defects that were peculiarly within its knowledge and not reasonably discoverable by the purchaser?
Opinions:
Majority - Mazzarelli, J.P.
Yes, a 'no reliance' clause and extensive due diligence rights do not necessarily preclude a purchaser's fraud claims when the seller allegedly made active misrepresentations about latent defects peculiarly within its knowledge and not reasonably discoverable. The court held that the breach of contract claims, based on specific Article XIII representations that survived closing, were time-barred by the contract's nine-month limitations period because plaintiff did not allege active concealment preventing discovery of those specific breaches within that period. However, the merger doctrine and 'as is' clause did not bar the fraud claims, as fraud is a recognized exception, and the specific contractual representations were intended to survive. The fraud claims were not duplicative of breach of contract claims because they were based on misrepresentations of 'then-present facts' (Khan's email, MSI letter) made to induce plaintiff to close. The 'special facts doctrine' applied to overcome the 'no reliance' clause. The court found it premature at the motion to dismiss stage to determine if plaintiff could have practically conducted the necessary destructive testing to uncover the latent defects, given contractual restrictions on interfering with business or tenant rights. The escrow agreements were not a waiver or accord and satisfaction as they were executed before plaintiff knew the full extent of the defects. The corporate veil piercing claim was sufficiently pleaded due to allegations of Khan and Criterion's domination and use of corporate form to commit fraud, but the successor liability claim was dismissed as it was tied to the time-barred breach of contract cause of action.
Dissenting - DeGrasse, J.
No, the fraud causes of action should have been dismissed. The dissent argued that the specific 'no reliance' clause in section 1.3 of the purchase agreement explicitly precluded any claim of justifiable reliance on Khan's email or the MSI letter, consistent with precedent like Danann Realty Corp. v. Harris. The 'special facts doctrine' was inapplicable because plaintiff could not establish that the information about the building's condition was peculiarly within the seller's knowledge or that it could not have been discovered through ordinary intelligence. Plaintiff had broad due diligence rights under section 7.1 of the agreement, including the ability to conduct destructive testing (subject to prompt repair and non-interference), and acknowledged evaluating the need to postpone closing for 'further testing' but proceeded anyway. The dissent concurred with the majority that the breach of contract and successor liability claims were time-barred by the contractual nine-month limitations period, as plaintiff failed to demonstrate an exception for equitable estoppel regarding the Article XIII breaches. Consequently, since the underlying claims against One Astoria were not viable, the claim to pierce its corporate veil should also have been dismissed.
Analysis:
This case provides important guidance on the enforceability of 'as is' and 'no reliance' clauses in real estate transactions within New York. It clarifies that while such contractual disclaimers are generally upheld, they are not absolute shields against fraud claims, particularly when sellers make active misrepresentations about latent defects uniquely within their knowledge. The decision emphasizes that at the motion to dismiss stage, courts will scrutinize the practical feasibility of a purchaser discovering such defects during due diligence, especially when contract terms might limit invasive investigations. This ruling highlights the distinction between a breach of contract and an independent fraud claim based on misrepresentations of present facts made to induce a transaction.
