Opinion
Civil Docket No.: CL17-13859
04-30-2018
RE: Fenner BL, LLC v. Fenner Garden Partners, LLC and Cheryl Hereford
Wayne G. Travell, Esquire
Jamie B. Wisegarver, Esquire
Mihir V. Elchuri, Esquire
Hirschler Fleischer, PC
8270 Greensboro Drive, Suite 700
Tysons Corner, VA 22102 James T. Lang, Esquire
Duncan G. Byers, Esquire
Pender & Coward
222 Central Park Avenue #400
Virginia Beach, VA 23462 Dear Counsel:
This matter comes before the Court on a motion styled Defendants' Demurrer and Motion to Strike. The motion challenges only Count 1 which alleges that Defendant Cheryl Hereford fraudulently induced Plaintiff to close on a purchase contract for the sale of an apartment complex. It does not challenge the sufficiency of Count 2, alleging breach of contract against the seller, Fenner Garden Partners, LLC. For the reasons stated herein, the Court OVERRULES Defendants' Demurrer and Motion to Strike.
FACTUAL BACKGROUND
Plaintiff's Complaint alleges that Defendant Fenner Garden Partners, LLC ("Fenner Garden") owned an apartment complex located in Norfolk, Virginia, called Fenner Garden Apartments (the "Property"). Pl.'s Compl. at 2. Fenner BL entered into a contract on August 2, 2017 (the "Contract") with Fenner Garden to purchase the Property for a price of $5,150,000. Paragraph 9 of the Complaint alleges that this purchase price "was based on a monthly rental income of $55,920." The allegation that the parties agreed to a price on August 2, 2017 that was based on a particular monthly rental income level suggests that the seller had provided that rental income figure prior to the execution of the purchase agreement, which is an important factor in the fraudulent inducement analysis.
The Contract provides in section 9.1.16 that "The Rent Roll (and any updates thereto) is true and correct in all material respects." This language references a Rent Roll that existed as of August 2, 2017, the Contract date; but the only Rent Roll described in the Complaint and the parties' briefs is one provided on October 31, 2017, by Cheryl Hereford, the Manager and member of Fenner Garden. The Complaint and section 9.1.16 of the Contract supports an inference that Plaintiff relied on something provided before the Contract was executed to arrive at the price. Id. Following receipt of the October Rent Roll Certificate, in which Hereford certified that the rents reported was true and correct, Fenner BL proceeded to close for the original purchase price of $5,150,000. Id.
Plaintiff began operating the Property on November 1, 2017 and quickly discovered that the Rent Roll Certificate provided was materially false. Id. at 4. The monthly income for November and December 2017 was $36,057 and $34,916 respectively—significantly lower than the $55,920 figure that had been certified.
Plaintiff conducted an investigation into the falsity of the Rent Roll Certificate and subsequently filed a Complaint against Fenner Garden and Cheryl Hereford on December 22, 2017. Id. Plaintiff alleges that the true value of the Property based on the actual rental income was $2,700,700 and that it proceeded to close for the original contract price of $5,150,000 based on Hereford's material misrepresentation of rental income. Id. at 4-5. Defendants filed a Demurrer and Motion to Strike the claim of fraud in the inducement.
ANALYSIS
The Demurrer raises two related issues which both parties address: first, whether the source of duty rule bars the claim for fraudulent inducement as a general matter; and second, whether the claim lies against Hereford as an individual non-party to the contract, even if it would not He against Fenner Gardens, the seller. The Court is not persuaded at this stage that Plaintiff is barred as a matter of law from asserting a fraudulent inducement claim against the seller or its agent and will therefore permit the matter to proceed.
I. The Source of Duty Rule
Defendants argue that Plaintiff may not maintain any claim of fraud in the inducement arising from the falsity of the Rent Roll Certificate. Because the only duty to provide that certificate comes from the Contract, they contend that Plaintiff may not seek redress under tort law and must be limited to contractual relief. Defendants further argue that fraudulent inducement, where a contract is involved, may only be maintained where the fraud induces the party to enter into the contract. The Rent Roll certificate was provided almost three months after execution of the Purchase Agreement and thus could not have induced Plaintiff to enter it.
First, as noted, the Complaint and the Contract support the inference that a Rent Roll certificate was provided pre-Contract to support the $5,150,000 purchase price and induce Plaintiff to enter into the agreement. If, however, the information was not provided until after the agreement was signed but before the parties closed on it, nonetheless the claim may be actionable as fraud in the inducement.
Typically, fraud in the inducement regarding contracts is fraud that induces the other party to enter into the contract. "An action for fraudulent inducement need not, however, be limited to formation of the contract. Although formation was free of fraud, performance of an executory contract may be fraudulently induced." Ware v. Scott, 220 Va. 317, 320 (1979) (emphasis in original). Plaintiff claims that its decision to close and pay $5,150,000 for the Property was based directly on the fraudulent certification about the monthly rental income provided before closing.
Defendants rely on a series of Virginia Supreme Court cases where the Court disallowed tort claims between contracting parties based on the source of duty rule. See, e.g., Richmond Metropolitan Authority v. McDevitt Street Bovis, Inc., 256 Va. 553 (1998)("No duty apart from contract to do what is complained of exists"); Dunn Construction Co. v. Cloney, 278 Va. 260 (2009)("The fact that the representation was made in order to obtain payment ... does not take the fraud outside of the contract relationship"); Augusta Mutual Ins. Co. v. Mason, 274 Va. 199 (2007)("The duties [that the agent for the insurance company] allegedly violated by making fraudulent representations ....arose solely by virtue of the Agency Agreement"); Filak v. George, 267 Va. 612, 618 (2004)("Losses suffered as a result of the breach of a duty assumed only by agreement, rather than a duty imposed by law, remain the sole province of the law of contracts.")
The cases relied upon by Defendants do not involve claims of fraudulent inducement. The Court considers that Ware v. Scott, 220 Va. 317 (1979) is more analogous to the facts at bar. In Ware, the parties contracted for the purchase of residential property. Prior to entering into a contract, the buyers inquired into whether the property had ever had any water problems; and the sellers indicated that it had not, neglecting to mention that storm water from an overflowing pipe had overturned a stone wall along one side of the property the year before. The court determined that this pre-contract representation by the sellers was neither intended to deceive nor otherwise fraudulent. After entering into the contract but before closing, the property flooded again; and the sellers delayed the closing to fix the damage without disclosing the event to the buyers.
After the buyers experienced their own water-related problems at the property, they learned that the sellers had concealed the pre-closing flooding; and they sued for fraudulent inducement. The court determined that the seller's failure to disclose the water damage that occurred prior to the closing properly gave rise to a tort claim for fraudulently inducing the buyers to close on the property. The court stated in pertinent part:
When a vendor in an executory contract for the sale of realty acquires information after the formation of the contract, but before time for performance, and such post-contractual information negates a pre-contractual representation of a fact material to the sale and reveals that the contract was formed under a mutual mistake as to such fact, the vendor is under a duty to disclose that information to the vendee. When the breach of that duty induces the vendee to perform a voidable covenant to purchase, the breach constitutes fraudulent inducement to perform, and the vendee may recover damages resulting from such flood.Id. at 320-21. The court further ruled, "Although formation was free of fraud, performance of an executory contract may be fraudulently induced. Such is the case when one party fraudulently leads the other to believe that a condition precedent to the latter's duty to perform has been fulfilled." Id. at 320.
Defendants emphasize the contractual relationship between the parties as dispositive of the source of duty rule in this matter:
The Agreement at ¶5.3 creates the duty for Fenner Garden to deliver the rent roll to Fenner BL. The Agreement at ¶ 9.1.4 specifies that the rent roll must be 'true, complete and correct in all respects.' Absent the Agreement, Fenner Garden had no duty to deliver the rent roll. The Agreement is the source of Fenner Garden's duty to deliver a true, complete and correct rent roll to Fenner BL.Defendants Reply Memo. at 6.
It is true that Fenner Garden could have breached the contract and delivered no rent roll certificate without being liable in tort for that omission. But one who intentionally makes a false representation about an existing material fact, with intent to mislead that causes damage to one who has detrimentally relied on that representation, should not be insulated from a fraud claim because the representation was written into a contract rather than merely spoken.
The duty not to mislead others to their detriment arises from common law and not contract. Virginia continues to adhere to the familiar holding that "In certain circumstances, a single act or occurrence can support causes of action for both breach of contract and for breach of a duty arising in tort." Dunn Constr. Co. v. Cloney, 278 Va. 260, 266 (2009)(citing Foreign Mission Bd. V. Wade, 242 Va. 234, 241 (1991). That statement would be an inaccurate statement of law if, as Defendants suggest, all wrongs that occur among parties to a contract must necessarily be addressed only by contract remedies.
The duty that arises in tort between these parties is not any duty to provide a rent roll: it is the common law prohibition against making "(1) a false representation, (20 of a material fact, (3) made intentionally and knowingly, (4) with intent to mislead" that results in "(5) reliance by the party misled, and (6) resulting damage to the party misled." Evaluation Research Corp. v. Alequin, 247 Va. 143, 148 (1994).
As noted, although the Complaint does not precisely allege a pre-contract misrepresentation about the rental income, Plaintiff does allege that the contract price had been determined based on the monthly income that was eventually certified on October 31, 2017. The fraudulent Rent Roll Certificate provided support for that prior assertion and allegedly induced Fenner BL to continue to closing. These facts satisfy the requirements of an action for fraudulent inducement: "A false representation of a material fact, constituting an inducement to the contract, on which the purchaser had a right to rely, is always ground for rescission of the contract by a court of equity. Fraud in the inducement of a contract is also ground for an action for damages in a court of law." George Robberecht Seafood, Inc. v. Maitland Bros. Co., 220 Va. 109, 111-12 (1979).
The Court rules that the source of duty rule does not require dismissal of Count 1.
II. The Tort Claim Against Hereford Individually.
Plaintiff argues that Count 1 for fraudulent inducement was asserted only against Hereford, a non-party to the contract, such that the source of duty rule cases cited by Defendants do not apply. Defendants contend that she is subject to the source of duty rule, despite not being a party to the Contract, because she was acting as Fenner Garden's agent when she committed the alleged wrongdoing. Both parties cite cases that generally support their positions but none involving an individual agent of an entity who made a fraudulent misrepresentation that induced another to enter into or perform under a contract.
On demurrer, the Court may not evaluate the merits of the claims set forth in a complaint but may only review the sufficiency of the factual allegations to determine whether the pleading states a cause of action. Concerned Taxpayers of Brunswick County v. County of Brunswick, 249 Va. 320, 327-8 (1995). The Court does not conclude at this early stage of the litigation that no set of facts could be proven against Hereford to establish her liability to Plaintiff. The claim has been sufficiently pleaded and is not insufficient as a matter of law.
III. The motion to strike the damages claim.
Defendants request that Fenner BL's claim for damages of "not less than $2,700,700" be stricken, or alternatively capped at an amount of $100,000, pursuant to ¶ 10.5 of the Contract. (Def.s Dem. and Mot. to Strike at 7.) Paragraph 10.5 of the Contract states (in part):
In the event of a default by Seller hereunder or a breach by seller of the terms hereof prior to Closing, Purchaser may, on account thereof, following five (5) days' notice and opportunity to cure from Purchaser to Seller, and Seller's failure to cure such default within such period, in addition to all remedies contained elsewhere in this Agreement (i) waive such default and proceed to Closing, (ii) terminate this Agreement, in which event neither party shall have any further obligation hereunder...and Purchaser may collect its actual money damages from Seller, in an amount not to exceed commercially reasonable out of pocket costs and expenses actually incurred by Purchaser in connection with this Agreement and the proposed transaction, including without limitation reasonable attorney's fees and expenses, provided that all such damage shall not exceed in any event the sum of One Hundred Thousand and 00/100 Dollars ($100,000.00); or (iii) commence an action against Seller for specific performance of this Agreement.
Defendants argue that the $100,000 cap is a total limit on Plaintiff's ability to recover damages under the Contract. That argument is not supported by the above contract language, which indicates that the $100,000 limit applies only under subsection (ii), when the Agreement has been terminated prior to closing due to a Seller's default. Thus, the Court declines to strike Plaintiff's ad damnum and limit damages to $100,000.
CONCLUSION
For the reasons stated above, the Court finds that the Plaintiff may maintain its claim of fraud in the inducement against Hereford and is not limited to damages of $100,000 pursuant to the Contract. The Court OVERRULES Defendants' Demurrer and Motion to Strike.
Plaintiff's counsel is directed to prepare and circulate for endorsement an Order that incorporates the terms of this Opinion Letter. The Order should be presented to the Court within ten days.
Sincerely,
/s/
Mary Jane Hall
Circuit Court Judge MJH/MAN/nm