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Schooley v. Mannion: The Fact That Property Was Sold "As- is" Did Not Prevent a Lawsuit Based on Fraud in the Inducement

In a recent New York case, Schooley Associates bought a nine-unit apartment building (the "Property") from Circular Street Associates "CSA"). The contract specified that the Property was to be sold "as-is." After the transaction closed, tenants complained to Schooley about freezing pipes and high electric bills and Schooley discovered that the Property’s insulation was not as it had been stated to be in documents provided by CSA and as represented by Darlene Mannion, who was both a partner in CSA as well as the listing real estate salesperson for the Property for her broker, Bob Howard, Inc.

Seeking damages for fraud in the inducement and for breach of warranty, Schooley sued Mannion and CSA. Schooley claimed that Mannion, both individually and in her capacity as a real estate salesperson, induced Schooley to enter into the transaction by making false and fraudulent misrepresentations that the Property was fully insulated. Schooley also sought punitive damages, claiming that Mannion and CSA knew the representations were false and misleading. The defendants moved for dismissal of the case, arguing that Schooley had failed to state a cause of action. The lower court agreed and ruled in her favor.

Usually prior negotiations and agreements pertaining to a real estate transaction merge into the deed. However, on appeal, the New York Supreme Court, Appellate Division, stated that the merger doctrine is not applicable in cases like Schooley where the lawsuit is based on fraud. Moreover, the court stated that general merger or "as-is" contract provisions do not exclude parol evidence of fraud in the inducement. In this case, even though the contract stated that Schooley was taking the Property "as-is," the contract did not state that Schooley had inspected the Property. In addition, it did not affirmatively state that Schooley was not relying on any representations as to the Property’s physical condition. According to the court, even if there had been such disclaimers in the contract, the fact that knowledge about the alleged defect, inadequate insulation, was "peculiarly" within CSA’s knowledge would have been enough to salvage Schooley’s cause of action. The court found it significant that CSA recently had gutted and renovated the whole Property and also that the amount of insulation would not have been easy to determine without destructive testing.

The Supreme Court reversed the lower court’s decision. In the court’s view, a clear question of fact existed as to whether Mannion and CSA misrepresented the adequacy of the insulation in the Property and whether Schooley relied on such assurances. The fact that the Property was sold "as-is" did not prevent Schooley from pursuing his claims.

Schooley v. Mannion, 241 A.D.2d 677, 659 N.Y.S. 2d 374 (N.Y. App. Div. 1997).