In Arco Acquisitions, LLC v. Tiffany Plaza LLC, Justice Elizabeth Hazlitt Emerson of the Suffolk County Commercial Division granted defendants’ motion to dismiss Arco’s lawsuit, which alleged that defendants committed fraud in the sale of commercial real estate by misrepresenting incoming rent to inflate the value of the property.[1]  The Court found that the parties’ contract provided that Arco assumed all responsibility to investigate the property’s leases and tenancies, and held that the contractual disclaimer precluded Arco from claiming that it entered into the agreement due to fraudulent representations about the rent roll.

On October 4, 2017, Arco entered into an agreement to purchase commercial real estate from defendants Tiffany Plaza LLC and 1075 Farmingville LLC (the “Sellers”) for $10.5 million.[2]  As part of the agreement, the Sellers provided Arco with tenant certificates and a rent roll containing certain financial information, including incoming rent and whether any tenant was behind on rent.  The tenant certificates and rent roll did not reflect that any tenants were behind on rent.[3]  After the transaction closed, two tenants could no longer pay rent, and Arco alleged that the Sellers knew that the two tenants had been behind on rent prior to closing.[4] 

Arco filed a three-count complaint for fraud, aiding and abetting fraud, and piercing the corporate veil, alleging that the Sellers obtained false certificates from the tenants and misrepresented the rent roll to artificially increase the value of the property.[5]  Defendants moved to dismiss the complaint on the ground that a disclaimer in the parties’ contract barred Arco’s claims.

The Court began its analysis by explaining that fraud claims have been dismissed in cases where a contractual disclaimer of reliance on a specific representation “tracks the substance of the alleged misrepresentations” and is “sufficiently specific to match the alleged fraud.”[6]  For example, in Realty Corp. v. Harris, the New York Court of Appeals held that a purchaser’s fraud claim based on alleged misrepresentations concerning the building’s operating expenses was barred by a clause in the parties’ contract stating that the purchaser acknowledged that the seller made no representations as to “expenses” and was not “relying upon any statement or representation” of the seller.[7]  Justice Emerson also noted that when contracting parties are sophisticated entities and negotiate a disclaimer, the requirement that the disclaimer be sufficiently specific to match the alleged fraud “is more relaxed.”[8]

In this case, the parties’ contract placed “all responsibility” on Arco to investigate the “leases” of the subject property and stated that the parties had structured the purchase price of the property in consideration of this allocation of risk.  The contract also provided that Arco had “undertaken all such investigations and review” of the property’s “leases” and “tenancies,” and that Arco would be “relying strictly and solely upon such inspections and examinations” in determining that the purchase price was fair and adequate.[9]  In light of these provisions and the fact that the parties are sophisticated entities, the Court held that the parties’ contract barred Arco’s fraud claim.  The Court reasoned that Arco’s allegations that the Sellers misrepresented the rent roll “clearly track[ed] the language used in the disclaimer,” which disclaimed reliance on representations regarding leases and tenancies.[10]  The Court also noted that nothing prevented Arco from contacting tenants prior to closing to determine the accuracy of the rent roll.[11]  Because the Court dismissed Arco’s fraud claim, it also dismissed the derivative claims of (1) aiding and abetting fraud and (2) piercing the corporate veil, which the Court noted is not a valid cause of action in any event.

The Court’s decision highlights that contractual disclaimers of reliance on specific representations may in some instances preclude a subsequent claim for fraud at the pleading stage.  Especially when sophisticated parties affirm that they are not relying upon their counterparties’ representations as to a particular fact, they may be barred in some instances from asserting fraud based on their receipt of allegedly false information as to that same fact.