case. The claims of fraud and fraudulent inducement as to value lack factual basis and are unsupported by the record.
The next allegation leveled against the sellers in Count I is that they defrauded the Buyers by showing them the Davidson Appraisal which contained an error.
The alleged error concerns the sales price of a comparable undeveloped lot in an adjacent subdivision known as Overlook II. The lot had been sold by Sellers to James and Elizabeth Schmale. The Davidson appraisal stated that the Schmale property at Overlook II was sold for $ 178,500 when public documents recorded at Shelter Island Town Hall indicate that the purchase price was $ 110,000. The Buyers allege that the Sellers knew or should have known about this error because Sellers sold the property to Schmale. There is no basis for holding the Sellers or Carusona liable because they neither wrote the Davidson Appraisal nor vouched for its authenticity. Vitale v. Coyne Realty, Inc., 66 A.D.2d 562, 414 N.Y.S.2d 388, 393 (4th Dept. 1979).
Even assuming that the error could be imputed to Sellers or Carusona, the claim is baseless. The purchase price of the Schmale property was and is ascertainable by inspecting public records located at the Shelter Island Town Hall. Facts which are accessible as a matter of public record bar a claim of justifiable reliance necessary to sustain a cause of action for fraud. Grumman Allied Industries, Inc. v. Rohr Industries, Inc., 748 F.2d 729, 737 (2d Cir. 1984); Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 184 N.Y.S.2d 599, 603, 157 N.E.2d 597 (1959); Most v. Monti, 91 A.D.2d 606, 456 N.Y.S.2d 427, 428 (2d Dept. 1982). It is undisputed that Engstrom checked the sales price of the Schmale property during her review of public documents at Shelter Island Town Hall, discovered the error in the Davidson Appraisal, noted it on Simms' copy, and informed Sims about it prior to the purchase. Sellers' Ex. A, Simms Dep. II, 142, Ex. C, Engstrom Dep. I, 22-24, 47-53, II, 282-90, 292, III, 131-32; Ex. F; Supp. Ex. 1, DiLeo Dep. 165, 407-09; Supp. Ex. A, Simms Dep. 119-20. There cannot possibly be justifiable reliance on the error when it was both available as a matter of public record and discovered by and known to Buyers. This claim, which is of dubious relevance in the first place, has no legal or factual basis.
Buyers finally reference a May 20, 1985 appraisal of Overlook I apparently prepared by Sal Termini ("Termini Appraisal") for Biondo, which valued the site at $ 2.14 million. Buyers' Local Rule 3(g) Statement, P 63; Buyers' Opp. Mem. L. at 8. Buyers contend that Biondo should have but did not show it to them. This document was not produced by Buyers and consequently cannot support their opposition to the instant motions. Even if the Termini Appraisal were properly submitted before this court, it does not support a claim of fraud or fraudulent inducement because the Sellers had no obligation to show it to Buyers. Grumman, 748 F.2d at 738-39.
As a postscript, the Court notes that the Termini Appraisal antedates the Overlook I transaction by more than two years. As Simms noted, "if you look at the overall market in the northeast quarter, especially in the Connecticut/New York areas, any you saw what happened with property from '85 to mid-'87, the appreciation of property accelerated at a tremendous rate, 20, 25 percent in some cases, 50 percent in some cases on an annual basis." Sellers' Ex. A, Simms Dep. I, 126-27. If the 1985 Termini estimate were revised according to Simms' 20% annual appreciation rate, it would yield a 1987 appraised value of $ 3.081 million--an amount just shy of the Buyer's actual 1987 $ 3.1 million purchase price. This is yet another example of the lack of correspondence between the Buyer's accusations of foul play in the Overlook I transaction and the actual facts surrounding the purchase.
2. Count III: Negligent Misrepresentation
In Count III, Buyers combine the above-described allegations in Count I as the predicate for a claim of negligent misrepresentation against Sellers and Carusona. The Contract of Sale, Paragraph 22, states,
all prior understandings and agreements between seller and purchaser are merged in their contract. It completely expresses their full agreement. It has been entered into after full investigation, neither party relying upon any statements made by anyone else that is not set forth in this contract. Sellers' Ex H. [emphasis added]
This "merger" clause bars a claim for negligent misrepresentation as a matter of law. Chase Manhattan Bank, N.A. v. Edwards, 87 A.D.2d 935, 450 N.Y.S.2d 76, 78 (3d Dept. 1982), aff'd 59 N.Y.2d 817, 464 N.Y.S.2d 739, 451 N.E.2d 486 (1983); Dorsey Products Corp. v. United States Rubber Co., 21 A.D.2d 866, 251 N.Y.S.2d 311, 313 (1st Dept. 1964), aff'd 16 N.Y.2d 925, 264 N.Y.S.2d 917, 212 N.E.2d 435 (1965). Even if the merger clause does not bar this claim, it is defective. A cause of action for negligent misrepresentation is valid only if the "parties relationship suggests a closer degree of trust and reliance than that of the ordinary buyer and seller." American Protein Corp. v. AB Volvo, 844 F.2d 56, 63 (2d Cir.), cert. denied 488 U.S. 852, 102 L. Ed. 2d 109, 109 S. Ct. 136 (1988), quoting Coolite Corp. v. American Cyanamid Co., 52 A.D.2d 486, 384 N.Y.S.2d 808, 811 (1st Dept. 1976). Buyers have not even alleged the existence of a special relationship with Sellers or Carusona and consequently the claim must fail. American Protein, 844 F.2d at 64.
3. Count VI: Inducement of Breach of Eastern Appraisal Contract
Sellers next dispute the sufficiency of Count VI, in which Buyers allege that Sellers induced breach of the Eastern Appraisal Contract. Buyers allege that Richard Winters, their mortgage broker, secretly worked on behalf of Sellers and somehow influenced Eastern to prepare an inflated value estimate in the Eastern Appraisal. Even assuming that the Eastern Appraisal Contrast existed, the claim that the Sellers' alleged inducement through Winters "caused Plaintiffs to bid and pay a higher price than that which they would have bid and paid absent the fraudulent inducement. . . ." is absurd. Amend. Com. P 83. Buyers entered into the Contract of Sale for $ 3.1 million approximately three months before Eastern produced the Eastern Appraisal which valued Overlook I at $ 3.155 million. Buyers could not have been caused to pay a greater amount than they otherwise would have because at the time of the alleged breach of the Eastern Appraisal Contract they were already bound by the purchase price in the Contract of Sale. Moreover, Richard Winters was not even engaged as Buyers' agent until after the Contract of Sale was signed. See Sellers' Supp. Ex. B.
Buyers next claim that had they known about the Participation Agreement between Sellers and Eastern, they would not have purchased Overlook I. Buyers have failed to establish the source of the duty through which Sellers or Carusona were required to notify the Buyers about the Participation Agreement. The Participation Agreement was independent and apart from any legal relationship between the Sellers and Buyers and consequently this claim must fail as a matter of law.
Finally, Buyers assert that the alleged failure to disclose the Participation Agreement violated the Contract of Sale, Rider A, Paragraph 8, which required the Buyers to make all reasonable efforts to obtain a commitment for a "Conventional Mortgage" with a bank. Sellers' Ex. H. This claim is spurious. A conventional mortgage is defined as "a contract by which a person binds the whole of his property . . . in favor of another, to secure the execution of some engagement, but without divesting himself of possession." Black's Law Dictionary 911 (5th ed. 1979). Obviously, Buyers secured a conventional mortgage through the Mortgage Loan Commitment, and gave a conventional mortgage through the Mortgage itself, or otherwise title to Overlook I never would have been transferred. Simms has conceded as much. Sellers Supp. Aff. Ex. A, Simms Dep. I, 187-194. This claim, like all the others brought by Buyers against Sellers and Carusona, is defective as a matter of law and presents no issues of fact. Consequently, summary judgment is hereby granted to Sellers and Carusona on Counts I, II, III, IV, and VI of the Amended Complaint.
B. RTC's Motion for Summary Judgment on the Amended Complaint
1. Counts I and III: Fraud and Negligent Misrepresentation
Counts I and III against Eastern are based upon an alleged oral representation made by Donelan to Simms in December 1987 to the effect that Overlook I was worth at least $ 3.155 million. The RTC contends that 12 U.S.C. § 1823(e) and § 1821(d)(9)(A), which are both part of FIRREA, bar these claims because they turn on an "agreement" inducing the signing of the Note and Mortgage which must be, but was not, in writing, executed by Eastern, approved by the Eastern Board of Directors, and has been since that time an official record of Eastern.
Buyers resist the application of § 1823(e) on three grounds. First, they contend that the RTC lacks standing to invoke § 1823(e). 12 U.S.C. § 1441a(b)(4)(A) specifically empowers the RTC to utilize the provisions of § 1821 and § 1823. Second, Buyers claim that § 1823(e) and § 1821(d)(9)(A) cannot apply retroactively to the purchase of Overlook I because it occurred prior to the enactment of FIRREA. This retroactivity argument is baseless because the lawsuit commenced more than one year after FIRREA became law.
Moreover, Buyers implicitly conceded the applicability of FIRREA in their successful opposition to the RTC's motion to dismiss. See Simms, 785 F. Supp. at 324. Third, Buyers assert that § 1823(e) does not apply because Donelan's representation concerning the value of Overlook I is not an agreement as defined therein. In Langley v. FDIC, 484 U.S. 86, 93, 98 L. Ed. 2d 340, 108 S. Ct. 396 (1987), a unanimous Supreme Court held that a representation by a bank as to the "truthfulness of a warranted fact" is an agreement which must conform to the requirements of § 1823(e). Under Langley, Donelan's representation about the value of Overlook I qualifies as a § 1823(e) agreement and consequently Counts I and II are invalid as a matter of law. See also FDIC v. Bernstein, 944 F.2d 101, 108 (2d Cir. 1991) ("Section 1823(e) . . . has been interpreted to prohibit the assertion against the . . . [RTC] . . . of bank misrepresentations inducing the execution of a note and guaranty").
Buyers also assert that Eastern's failure to disclose that it entered into the Participation Agreement with the Sellers constitutes fraud in the factum on the Note and Mortgage because these documents do not indicate that Sellers were "lenders" along with Eastern. This claim is untimely and baseless. Fraud in the factum is the "sort of fraud that procures a party's signature to an instrument without knowledge of its true nature or contents." Langley, 484 U.S. at 93; see also N.Y. Uniform Commercial Code § 3-305(2)(c), Comment 7 (McKinney's 1991). If present, fraud in the factum "would take the instrument[s] out of § 1823(e), because it would render the instrument[s] entirely void. . . ." Langley, 484 U.S. at 93. The Note and Mortgage correctly state that Eastern is the sole payee and mortgagee, respectively. The Participation Agreement is "typical" in that the participants (Sellers) purchased an unsecured interest in a loan and have no recourse as a creditor of the borrowers (Buyers). Hibernia Nat. Bank v. FDIC, 733 F.2d 1403, 1407 (10th Cir. 1984); see G. Nelson and D. Whitman, Real Estate Finance Law § 5.35 (2d ed. 1985). There can be no fraud in the factum because the identification of Eastern in the Note and Mortgage as the exclusive lender is accurate.
2. Count V: Breach of Eastern Appraisal Contract
The next part of the motion brought by RTC concerns the validity of Count V, in which Buyers allege that Eastern breached the Eastern Appraisal Contract. Count V is without merit because the alleged Eastern Appraisal Contract was an oral agreement between Donelan and Simms which does not satisfy any of the requirements of § 1823(e). Perhaps anticipating this conclusion, Buyers have recrafted Count V in order to circumvent the requirements of § 1823(e) by arguing that the Eastern Appraisal Contract was written and recorded in the Eastern files as part of the Mortgage Loan Commitment. This revision is untimely and without merit. The Mortgage Loan Commitment states that one of the items "required at closing" from Buyers is "$ 750.00 additional . . . for credit and appraisal." Buyers' Ex. A. This condition does not create an appraisal contract but merely signifies an expense passed along to the Buyers from Eastern in order to cover the costs of producing the Eastern Appraisal. Consequently, summary judgment for RTC is hereby granted on Counts I, III and V of the Amended Complaint.
C. RTC's Motion for Summary Judgment on its Counterclaim for Foreclosure
Finally, RTC moves for summary judgment on its foreclosure counterclaim. Buyers defend against this counterclaim by raising affirmative defenses under New York law predicated on their affirmative claims. The above-stated reasoning justifies the conclusion that there are no valid defenses under federal or New York law. Summary judgment is hereby granted in favor of RTC on its counterclaim for foreclosure.
The Court has carefully considered the merits of the defendant Sellers', Carusona's and RTC's motions for summary judgment on the Amended Complaint, and for the reasons stated above, they are hereby GRANTED. Defendant RTC's motion for summary judgment on its counterclaim for foreclosure on the Note, Mortgage, and Extension Agreement is hereby GRANTED. Costs are hereby taxed against plaintiff Buyers pursuant to 28 U.S.C. § 1920.
Dated: Brooklyn, New York
February 26, 1993
John R. Bartels
UNITED STATES DISTRICT JUDGE