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Berk & Berk at Franklin Plaza II v. Franklin Electronic Publishers, Inc.

2011 WL 2935815 (App. Div. 2011) (Unpublished)

CONTRACTS — A buyer’s reliance on a prospectus is unjustified when the purchase agreement expressly disclaims any representations and provides for a due diligence period, placing the burden squarely on the buyer to satisfy itself as to the accuracy of factual statements made in the prospectus.

A seller offered two tracts for sale, one developed and one undeveloped. The seller had a title report and survey of the undeveloped property, but the survey did not identify the size of the property’s undevelopable wetlands. However, the broker obtained an appraisal that said the developed property was 13.25 acres with 5.5 acres of wetlands, and that the undeveloped property was 10.35 acres, with 1.24 acres of wetlands and 3.75 acres in a detention area. A map on file with the County Clerk’s office confirmed the size of the wetlands areas.

The broker prepared a flyer and a prospectus describing the developed property as 13.248 acres including 7.748 acres of developable land (net of wetlands). It described the undeveloped property as an adjoining parcel of vacant land containing 10.35 acres of land, inclusive of 1.24 acres of wetlands and 3.75 acres within a detention area. Thus, according to the flyer and appraisal, the amount of developable land on the undeveloped property was 5.36 acres.

The broker delivered a prospectus to a professional engineer (who was also a certified property manager). The engineer was the settler of a trust, and he controlled numerous real estate investment companies. The broker told this engineer that there were 7.75 developable acres on the undeveloped property, and the engineer believed him despite the contradictory description in the prospectus. In any event, the engineer signed an agreement acknowledging that neither the seller nor the broker were making any warranty as to the accuracy or completeness of the prospectus.

The engineer offered to buy the property, through the trust, for the listed price. He consulted a professional land planner, but did not ask him to investigate the amount of developable land. He also selected one of his own employees to conduct a due diligence evaluation of the property. That employee met with representative of the seller. The seller showed him the appraisal. The seller’s representative then sent a title report, without the survey, to the trust’s counsel, who responded by requesting a copy of the survey and of the appraisal. The engineer also told the seller that a new survey was being ordered. The seller’s representative was unable to produce the survey, but he sent the engineer’s employee and the engineer’s counsel the survey firm’s contact information. The seller’s representative also reminded the engineer’s employee that the survey and appraisal were not due diligence documents that the seller was required to provide pursuant to the contract. Nevertheless, the seller sent the employee a copy of the appraisal. Although the engineer’s counsel later insisted that his client had not received the appraisal before the end of the due diligence period and that the trust would not have proceeded with the contract if he had received it, the seller eventually produced e-mails from the employee acknowledging receipt of that appraisal.

The trust entered into a contract and gave a deposit. Subsequently, the trust assigned its interest to the engineer, as the buyer. The contract provided that the deposit was refundable within two business days after the expiration of the due diligence period. The due diligence period was until fifteen days after the execution date. The contract allowed the buyer to terminate the transaction before the expiration of the due diligence period if the buyer’s inspection disclosed any exceptions or conditions unsatisfactory to the buyer in its sole discretion. Also, it disclaimed any warranties or representations by the seller or any agent of the seller regarding the condition of the property, including environmental matters, and it reiterated that the property was being sold “as-is.” The contract had an integration clause.

The seller attached several due diligence documents to the agreement, including existing environmental reports and copies of the last title report, but not a survey or the appraisal. The agreement called for closing thirty days after the expiration of the due diligence period. Time was made of the essence. The surveyor did not complete its survey until one day before the end of the due diligence period. The buyer received another copy of the appraisal from the seller. He then wrote to the seller that the developable area of the undeveloped property was only 5.428 acres and requested a reduction in the purchase price. The buyer then received a report indicating that 5.110 acres of the undeveloped property were wetlands and that 5.249 acres were developable. The surveyor also expressed concern that building setback requirements might prevent development of part of those 5.249 acres. In its letter, the surveyor referenced a survey it had completed years prior. The seller refused to reduce the price, responding that time was of the essence. The buyer’s counsel responded that closing was impossible until the title company reviewed the new survey.

Three months after closing, the buyer sued both the seller and the broker alleging intentional fraud, misrepresentation, and negligence. He sought compensatory and punitive damages, attorneys’ fees, and costs. More than eight months after the complaint was filed, the land planner informed him that only eight tenths of an acre of the undeveloped property could be developed. Nearly two years after the litigation commenced, the buyer filed a second lawsuit, this time alleging consumer fraud claims and seeking treble compensatory damages, attorneys’ fees, and costs. The seller and the broker moved for summary judgment and the buyer cross-moved. The lower court granted the seller’s and broker’s motion for summary judgment and denied the buyer’s motion.

In an appeal to the Appellate Division, the buyer contended that the seller and the broker were not entitled to summary judgment in view of their unconscionable conduct and sharp dealing; and asserted that the lower court failed to consider the equitable principles of good faith and fair dealing. The Court found that the buyer’s reliance on the prospectus was unjustified because the agreement expressly disclaimed any representations and provided for a due diligence period. Thus, the burden was squarely on the buyer to satisfy himself as to what portion of the land was developable. Also, the Court disagreed that there was a mutual mistake. There was no common assumption by the contracting parties to the contract of a certain quantity of developable property. The buyer bore the burden of independently verifying the developable area and he was not entitled to rely on any representations by the seller or marketer.

The buyer then argued that the seller violated the duty of good faith and fair dealing by withholding information regarding the developable acreage. However, the Court found that this alone would not enough to establish bad faith. There was nothing in the record indicating that the seller or broker were aware that the property was undevelopable, because none of the surveys or appraisals that were performed for the seller ever indicated this. Finally, the Court found that the lower court properly applied the entire controversy doctrine in barring the buyer from raising a consumer fraud claim in a second lawsuit because, if such a claim existed, it would have been germane to the previous allegations of breach of contract and fraud.

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