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Business Law 13th Edition by Frank Cross, Kenneth Clarkson, Roger LeRoy Miller
Edition 13ISBN: 978-1133046783Business Law 13th Edition by Frank Cross, Kenneth Clarkson, Roger LeRoy Miller
Edition 13ISBN: 978-1133046783 Exercise 18
BACKGROUND AND FACTS Peter Fazio began talks with Cypress/GR Houston I, LP, to buy retail property whose main tenant was a Garden Ridge store. In performing a background investigation, Fazio and his agents became concerned about Garden Ridge's financial health. Nevertheless, after being assured that Garden Ridge had a positive financial outlook, Fazio sent Cypress a letter of intent to buy the property for $7.67 million "based on the currently reported absolute net income of $805,040." Cypress then agreed to provide all information in its possession, but it failed to disclose that:
1. A consultant for Garden Ridge had recently requested a $240,000 reduction in the annual rent as part of a restructuring of the company's real estate leases.
2. Cypress's bank was so concerned about Garden Ridge's financial health that it had required a personal guaranty of the property's loan. The parties entered into a purchase agreement, but Garden Ridge went into bankruptcy shortly after the deal closed. Fazio sued Cypress for fraud after he was forced to sell the property for only $3.75 million. A jury found in Fazio's favor, but the trial court awarded judgment n.o.v. ("notwithstanding the verdict"- see Chapter 3) to Cypress. Fazio appealed.
IN THE LANGUAGE OF THE COURT
Evelyn V. KEYES, Justice.
* * * We * * * hold that Fazio's claims clearly fall within the category of claims for which an action for fraudulent inducement lies. [Emphasis added.]
Cypress knew from the express representation in the LOI [letter of intent] that Fazio was willing to pay the requested purchase price of $7,667,000 for the Property "based on the currently reported absolute net income of $805,040." It further knew that this income was generated by rental income received from Garden Ridge. Fazio agreed in the LOI to conduct due diligence [background investigation], and, in accepting the LOI, Cypress agreed to "provide Buyer with all information in [its] possession * * *." Fazio, an experienced real estate investor, and his experienced agents conducted reasonable due diligence before Fazio signed the Purchase Agreement, including requesting and reviewing all economic information about the Property in Cypress's possession. When Fazio discovered disturbing information about Garden Ridge in the financial statements provided to him, he conducted further investigations with both Garden Ridge and Cypress. He was repeatedly assured that all was well and that Garden Ridge anticipated strong sales * * *.
A reasonable person in Fazio's position would clearly have attached importance to the facts that approximately eight months before he purchased the Property in September 2003, Garden Ridge had retained [a consultant] to assist it in restructuring and renegotiating Garden Ridge's real estate leases; [the consultant] had prepared a letter for Garden Ridge to send to landlords; a copy of that letter, stating that Garden Ridge was restructuring and that as part of its restructuring it needed to reduce its occupancy costs at certain stores, including the Garden Ridge store on the Property, was sent to Cypress's President, Maguire, on March 5, 2003; and [the consultant] had contacted Cypress's Director of Finance and others at Cypress on at least three other occasions to discuss the proposed rent relief, seeking an annual rent reduction of 30% for the Property, or $241,512.
A reasonable real estate investor who had signed an LOI to purchase the Property for $7,667,000 on September 2, 2003 would also attach importance to and be induced to act on the information that, on August 14, 2003, Cypress's lender, Guaranty Bank, had requested that Cypress's President execute a personal guaranty of the balance of $4,500,000 on the $5,704,000 loan secured by the Property because the bank was concerned about Garden Ridge's financial condition.
* * * We * * * hold that Cypress's active concealment of this material information, which it was under a duty to disclose as financial information material to the real estate transaction in its possession, was fraudulent as a matter of law.
DECISION AND REMEDY The Texas appellate court reversed the trial court and held that Cypress was liable to Fazio for fraud.
THE ETHICAL DIMENSION Was Cypress's conduct unethical? Why or why not?
THE SOCIAL DIMENSION What does the decision in this case suggest to sellers of commercial real estate and others who engage in business negotiations?
1. A consultant for Garden Ridge had recently requested a $240,000 reduction in the annual rent as part of a restructuring of the company's real estate leases.
2. Cypress's bank was so concerned about Garden Ridge's financial health that it had required a personal guaranty of the property's loan. The parties entered into a purchase agreement, but Garden Ridge went into bankruptcy shortly after the deal closed. Fazio sued Cypress for fraud after he was forced to sell the property for only $3.75 million. A jury found in Fazio's favor, but the trial court awarded judgment n.o.v. ("notwithstanding the verdict"- see Chapter 3) to Cypress. Fazio appealed.
IN THE LANGUAGE OF THE COURT
Evelyn V. KEYES, Justice.
* * * We * * * hold that Fazio's claims clearly fall within the category of claims for which an action for fraudulent inducement lies. [Emphasis added.]
Cypress knew from the express representation in the LOI [letter of intent] that Fazio was willing to pay the requested purchase price of $7,667,000 for the Property "based on the currently reported absolute net income of $805,040." It further knew that this income was generated by rental income received from Garden Ridge. Fazio agreed in the LOI to conduct due diligence [background investigation], and, in accepting the LOI, Cypress agreed to "provide Buyer with all information in [its] possession * * *." Fazio, an experienced real estate investor, and his experienced agents conducted reasonable due diligence before Fazio signed the Purchase Agreement, including requesting and reviewing all economic information about the Property in Cypress's possession. When Fazio discovered disturbing information about Garden Ridge in the financial statements provided to him, he conducted further investigations with both Garden Ridge and Cypress. He was repeatedly assured that all was well and that Garden Ridge anticipated strong sales * * *.
A reasonable person in Fazio's position would clearly have attached importance to the facts that approximately eight months before he purchased the Property in September 2003, Garden Ridge had retained [a consultant] to assist it in restructuring and renegotiating Garden Ridge's real estate leases; [the consultant] had prepared a letter for Garden Ridge to send to landlords; a copy of that letter, stating that Garden Ridge was restructuring and that as part of its restructuring it needed to reduce its occupancy costs at certain stores, including the Garden Ridge store on the Property, was sent to Cypress's President, Maguire, on March 5, 2003; and [the consultant] had contacted Cypress's Director of Finance and others at Cypress on at least three other occasions to discuss the proposed rent relief, seeking an annual rent reduction of 30% for the Property, or $241,512.
A reasonable real estate investor who had signed an LOI to purchase the Property for $7,667,000 on September 2, 2003 would also attach importance to and be induced to act on the information that, on August 14, 2003, Cypress's lender, Guaranty Bank, had requested that Cypress's President execute a personal guaranty of the balance of $4,500,000 on the $5,704,000 loan secured by the Property because the bank was concerned about Garden Ridge's financial condition.
* * * We * * * hold that Cypress's active concealment of this material information, which it was under a duty to disclose as financial information material to the real estate transaction in its possession, was fraudulent as a matter of law.
DECISION AND REMEDY The Texas appellate court reversed the trial court and held that Cypress was liable to Fazio for fraud.
THE ETHICAL DIMENSION Was Cypress's conduct unethical? Why or why not?
THE SOCIAL DIMENSION What does the decision in this case suggest to sellers of commercial real estate and others who engage in business negotiations?
Explanation
Verified
Verified
Ethical dimension
Yes, C's conduct was ...
Business Law 13th Edition by Frank Cross, Kenneth Clarkson, Roger LeRoy Miller
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