Peter Fazio, Shari Fazio, and Eric Fazio v. Cypress/GR Houston I, L. P. Cypress/GR Houston, Inc. And Cypress Equities, Inc.

Opinion

Dissenting opinion issued January 19, 2012

In The

Court of Appeals

For The

First District of Texas

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NO. 01-09-00728-CV

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Peter Fazio, Shari Fazio, and Eric Fazio, Appellants

V.

Cypress/GR Houston I, L.P.; Cypress/GR Houston, Inc.; And Cypress Equities, INC., Appellees

and

Cypress/GR Houston I, L.P.; Cypress/GR Houston, Inc.; And Cypress Equities, INC., Appellants

Peter Fazio, Appellee

On Appeal from the 129th District Court

Harris County, Texas

Trial Court Case No. 2004-65110

DISSENTING OPINION

          I respectfully dissent.  I would affirm the trial court’s ruling that the parties’ disclaimer of reliance foreclosed any subsequent claim that the buyer was fraudulently induced to enter into the transaction.  My disagreement with the majority’s conclusion is primarily based upon my conclusion that the Purchase Agreement clearly and unequivocally expresses an intention to disclaim the buyer’s reliance on the seller’s representations and omissions from representations with respect to the economic condition of the property.

As a predicate matter, the majority errs by concluding that the due diligence terms of the Letter of Intent, including the provision that “[t]he Seller will provide Buyer with all information in their possession,” “became a binding agreement upon the execution of the Purchase Agreement.”  Majority Op. at 7.  Instead, as is customary and as the parties expressly contemplated at the time the LOI was executed, the terms of the LOI were displaced by and replaced with the terms of the Purchase Agreement.  The LOI itself provided that it was “an expression of understanding and intention only, and if accepted, will provide guidance for drafting a formal Purchase Agreement.”  The LOI went on to specify that “Terms and conditions set forth in this proposal shall not be binding on both parties until and unless a formal Purchase Agreement is executed and delivered to both parties.”

          When the parties did execute a formal Purchase Agreement, they replaced the due diligence provisions of the LOI with a much more detailed “Inspection” provision, contained in Article V of the Agreement.  Consistent with the parties’ expectations as expressed in the LOI, the Purchase Agreement also contained a merger clause which provided: “This Agreement contains the entire agreement of the parties hereto.  There are no other agreements, oral or written, and this Agreement can be amended only by written agreement signed by the parties hereto, and by reference, made a part hereof.”  Thus the parties’ express agreement as it pertains to the seller’s disclosure obligations is contained in the Purchase Agreement, and not in the LOI.

          Divorcing the terms of the LOI from the analysis and focusing solely upon the terms of the Purchase Agreement, that contract includes a clear and unequivocal expression of intent to disclaim the buyer’s reliance on the completeness of the documentation provided to it by the seller.  Article V of the Purchase Agreement contains the parties’ agreement about the parameters of the buyer’s opportunity to perform due diligence.  Section 5.1 is entitled “Inspection Period,” and it provides for a 30-day period, commencing on the “Effective Date,” during which time the buyer was afforded reasonable opportunities to enter and inspect the property.  During the first 10 days of the Inspection Period, the seller was required to deliver a group of “Documents” to the purchaser, as defined in section 5.2, which is devoted to describing and limiting the seller’s disclosure obligations.  The “Documents” to be disclosed were “copies of the Lease and all amendments thereto,” “the Survey,” “copies of any Plans,” “to the extent allowed by the author, copies of all existing soil, engineering, architectural, and environmental reports covering the Property in Seller’s possession,” “copies of all Service Contracts, if any,” and “copies of all Permits.”  Section 5.2 included provisions for the treatment of proprietary information within the “Documents” and for the return of all “Documents” in the event the Purchase Agreement was terminated.

          Importantly, section 5.2(d) is entitled “No Representation or Warranty by Seller.”  In it, the buyer acknowledged:

[E]xcept as otherwise specifically set forth in this Agreement, Seller has not made and does not make any warranty or representation regarding the truth, accuracy, or completeness of, the Documents or the source(s) thereof, and that Seller has not undertaken any independent investigation as to the truth, accuracy, or completeness of the Documents and is providing the Documents solely as an accommodation to Purchaser.

The foregoing language did not affirmatively authorize the seller to misrepresent the truth or to knowingly conceal information, but it could reflect the parties’ intention to limit the scope of the seller’s obligations to search for and investigate the “Documents” to be provided by the seller.  More critically, the following sentence provided:

Except with respect to any express warranties made in this Agreement, Seller expressly disclaims and Purchaser waives any and all liability for representations or warranties, express or implied, statements of fact, and other matters contained in the Documents, or for any omissions from the Documents, or in any other written or oral communications transmitted or made available to Purchaser.

This sentence expressly addressed the seller’s “liability” in connection with providing the “Documents.”  The sentence clearly and unequivocally provided that the seller “expressly disclaims”—and that the buyer “waives”—“any and all liability” for everything “contained in the Documents.”[1]  And beyond the information affirmatively provided by disclosing the “Documents,” the express disclaimer and waiver of liability also extended to “any omissions” from information was provided, regardless of whether it should have been disclosed as part of the “Documents.”  That same seller’s disclaimer of liability and buyer’s waiver of liability extended to “any omissions from the Documents, or in any other written or oral communications transmitted or made available to Purchaser.”[2]  Consistent with these provisions immunizing the seller from liability for errors or omissions in communications to the buyer, section 5.2(d) concluded by affirming that the buyer was accepting responsibility for developing the information necessary to satisfy itself about the property it was buying:

Except with respect to any express warranties made in this Agreement, Purchaser shall rely solely upon its own investigation with respect to the Property, including, without limitation, the Property’s physical, environmental, or economic condition, compliance or lack of compliance with any ordinance, order, permit, or regulation or any other attribute or matter relating thereto.

The buyer’s specific affirmation that it was relying solely upon its own investigation, and the parties’ deliberate intent to foreclose both liability for the seller’s affirmative communications to the buyer and omissions therefrom, are further confirmed by the Purchase Agreement’s inclusion of an “as-is” provision in section 5.5, which provided, in relevant part:

Property Conveyed “AS IS”.

(a)     EXCEPT AS OTHERWISE PROVIDED HEREIN OR IN THE DEED . . . (2) PURCHASER HEREBY EXPRESSLY ACKNOWLEDGES AND AGREES THAT (A) PURCHASER HAS OR WILL HAVE, PRIOR TO THE END OF THE INSPECTION PERIOD, THOROUGHLY INSPECTED AND EXAMINED THE PROPERTY TO THE EXTENT DEEMED NECESSARY BY PURCHASER IN ORDER TO ENABLE PURCHASER TO EVALUATE THE PURCHASE OF THE PROPERTY AND (B) PURCHASER IS RELYING SOLELY UPON SUCH INSPECTIONS, EXAMINATIONS, AND EVALUATION OF THE PROPERTY BY PURCHASER IN PURCHASING THE PROPERTY ON AN “AS IS”, “WHERE IS” AND “WITH ALL FAULTS” BASIS, WITHOUT REPRESENTATIONS, WARRANTIES OR COVENANTS, EXPRESS OR IMPLIED, OF ANY KIND OR NATURE.    

. . . .  

          Although the majority opinion characterizes the Texas Supreme Court’s recent Italian Cowboy opinion as containing a fact pattern that “closely mirrors” this case, see Majority Op. at 25, I disagree with that comparison.  The language relied upon in that case as a purported disclaimer of reliance provided: “Tenant acknowledges that neither Landlord nor Landlord’s agents, employees, or contractors have made any representations or promises with respect to the Site, the Shopping Center or this Lease except as expressly set forth herein.”  Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 328 (Tex. 2011).  The Court compared this language to the provisions found to be effective disclaimers of reliance in Schlumberger[3] and Forest Oil,[4] and concluded that lease language at issue in the case did not include clear and unequivocal language expressly disclaiming reliance on representations and affirming reliance on one’s own judgment.  See id. at 336.  Instead, the Italian Cowboy Court found the language at issue to indicate “nothing more than the provisions of a standard merger clause,” which is not sufficient to indicate an intent to disclaim reliance.  Id. at 334.

          This case is distinguishable from Italian Cowboy in at least two respects.  First, the critical language in the Purchase Agreement uses the term “rely” in providing that the “Purchaser shall rely solely upon its own investigation with respect to the Property.”  (Emphasis supplied.)  “Rely” is also used in the “as-is” clause, where the buyer affirmed it was “RELYING SOLELY UPON SUCH INSPECTIONS, EXAMINATIONS, AND EVALUATION OF THE PROPERTY” as it deemed necessary to enable its evaluation of the transaction.  This factor was expressly noted in Italian Cowboy to distinguish that case from Schlumberger and Forest Oil, both of which featured contracts using the term “rely” to clearly and unequivocally indicate a party’s intent to rely on its own judgment.  See id. at 336 (relying upon language quoted in notes 3 & 4, supra).  Second, the key language at issue cannot be characterized as merely echoing the intent and purpose of a merger clause.  Rather, the language specifically references “liability” arising from representations or omissions from documents or other written or oral communications, and it clearly and unequivocally provides that the seller disclaims and that the buyer waives “any and all” liability of that nature.

The buyer-plaintiffs’ claims in this case arise from their allegation that the seller-defendants failed to disclose information about economic risks to the property owner, i.e., the financial condition of the property’s tenant and the tenant’s requests for rent relief, facts which affected the value of the income stream expected from renting the property to that tenant.  I would hold that the Purchase Agreement’s express disclaimer and waiver of seller liability arising from representations or omissions in the parties’ communications leading up to the closing of the transaction, combined with the acknowledgement that “Purchaser shall rely solely upon its own investigation with respect to the Property, including, without limitation, the Property’s . . . economic condition,” constitutes clear, specific, and unequivocal disclaimer of reliance sufficient to preclude this subsequent claim of fraudulent inducement.  See Forest Oil Corp. v. McAllen, 268 S.W.3d 51, 61 (Tex. 2008); Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 179 (Tex. 1997).

          The question remains, however, whether the disclaimer is binding in light of the totality of circumstances surrounding this contract.  See Forest Oil, 268 S.W.3d at 61; Schlumberger, 959 S.W.2d at 179.  This is a legal question which we review de novo.  Forest Oil, 268 S.W.3d at 55.  The factors that guided the Supreme Court’s reasoning in Schlumberger and Forest Oil included:

(1) the terms of the contract were negotiated, rather than boilerplate, and during negotiations the parties specifically discussed the issue which has become the topic of the subsequent dispute; (2) the complaining party was represented by counsel; (3) the parties dealt with each other in an arm’s length transaction; (4) the parties were knowledgeable in business matters; and (5) the release language was clear.

Id. at 60.  The Fazios do not dispute that this was an arm’s length transaction.  As explained above, the language disclaiming reliance and waiving liability based upon seller representations was clear.

The other aspects of this transaction also support enforcing the agreement as written.  Fazio is an experienced and sophisticated real estate investor.  This was a $7,667,000 commercial transaction.  The agreement was not presented to Fazio as non-negotiable boilerplate—in fact, he requested changes, including a change to delete any reference to him having the agreement reviewed by legal counsel.  He similarly could have requested deletion of all or part of section 5.2(d) and 5.5.[5]  Moreover, Fazio’s request to remove a reference to his use of counsel demonstrated not only that he had the opportunity to review and negotiate the language of the contract, but also that his choice to forego the assistance of counsel was deliberate.  Fazio obviously had ample resources to consult counsel.  He routinely employed the professional assistance of real estate brokers, but chose not to employ the professional assistance of legal counsel.  Under such circumstances, he assumed the risk of proceeding without counsel, and his choice in that regard should not excuse him from being bound to the terms of his contract.

Unlike Schlumberger and Forest Oil, both of which involved settlement agreements, a final resolution of all disputes among the parties is not a factor informing the overall circumstances of this real estate transaction.  And the record does not reflect specific negotiations about the provision at issue.  Nevertheless, I would hold that, on balance, these factors are outweighed by the clear language of the contract, the arm’s-length nature of the transaction, the experience and sophistication of the parties, the magnitude of the transaction, and the complaining party’s deliberate choice to forego the assistance of legal counsel despite manifest opportunity and ability to have the assistance of an attorney.

          Accordingly, I would affirm the trial court’s rendition of judgment notwithstanding the verdict.

                                                                   Michael Massengale

                                                                   Justice

Panel consists of Justices Keyes, Sharp, and Massengale.

Justice Massengale, dissenting.

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[1]           In the legalese of the Purchase Agreement, the matters “contained in the Documents” for which the “Seller expressly disclaims and the buyer waives any and all liability” are described as: (a) “representations or warranties, express or implied,” (b) “statements of fact,” and (c) “other matters contained” therein.

[2]           The majority mistakenly analyzes section 5.2(d)’s reference to “omissions” as if it were limited to “omissions from the Documents,” see Majority Op. at 31–32, and did not also embrace “omissions . . . in any other written or oral communications transmitted or made available to Purchaser.”  This is a grammatically incorrect reading of the contract.  The phrase “in any other written or oral communications transmitted or made available to Purchaser” properly can be read only as a modification of “omissions.”  The only other conceivable function of that phrase in the sentence would be to modify the reference to “liability,” but that reading would require the implausible assumption that the contract was drafted to disclaim and waive “liability . . . in any other written or oral communications transmitted or made available to Purchaser.”  (Emphasis supplied.)  One does not ordinarily speak of liability “in” a matter, but of liability “for” something.  The correct, and more natural, reading of the contract language is that liability is disclaimed and waived “for any omissions . . . in any other written or oral communications transmitted or made available to Purchaser.”  (Emphasis supplied.) 

[3]           The Italian Cowboy opinion quoted and relied upon the following language from the settlement agreement at issue in Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171 (Tex. 1997):

[E]ach of us . . . expressly warrants and represents . . . that no promise or agreement which is not herein expressed has been made to him or her in executing this release, and that none of us is relying upon any statement or representation of any agent of the parties being released hereby.  Each of us is relying on his or her own judgment . . . .

Italian Cowboy, 341 S.W.3d at 336 (quoting Schlumberger, 959 S.W.2d at 180 (emphasis added in Italian Cowboy)).

[4]           The opinion quoted and relied upon the following language from the settlement agreement at issue in Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (Tex. 2008):

[We] expressly represent and warrant . . . that no promise or agreement which is not herein expressed has been made to them in executing the releases contained in this Agreement, and that they are not relying upon any statement or representation of any of the parties being released hereby.  [We] are relying upon [our] own judgment . . . .

Italian Cowboy, 341 S.W.3d at 336 (quoting Forest Oil, 268 S.W.3d at 54 (emphasis added in Italian Cowboy)).

[5]           See Prudential Ins. Co. v. Jefferson Assocs., Ltd., 896 S.W.2d 156, 161 (Tex. 1995) (noting that instead of agreeing to buy property “as is,” a buyer “could insist instead that the seller assume part or all of that risk by obtaining warranties to the desired effect,” and further noting that “[i]f the seller is willing to give such assurances, however, he will ordinarily insist upon additional compensation”).