Opinion ID: 655296
Heading Depth: 2
Heading Rank: 1

Heading: The Claims of Fraudulent Inducement

Text: 26 Under New York law, which by the terms of the Guarantee governs this diversity action, if a contract recites that all of the parties' agreements are merged in the written document, parol evidence is not admissible to vary, or permit escape from, the terms of the integrated contract. See, e.g., Fogelson v. Rackfay Construction Co., 300 N.Y. 334, 340, 90 N.E.2d 881, 884 (1950). Such a general merger clause is ineffective, however, to preclude parol evidence that a party was induced to enter the contract by means of fraud. See, e.g., Sabo v. Delman, 3 N.Y.2d 155, 161-62, 164 N.Y.S.2d 714, 717-19, 143 N.E.2d 906 (1957); Bridger v. Goldsmith, 143 N.Y. 424, 428, 38 N.E. 458, 459 (1894) (general rule is that fraud vitiates every transaction). Thus, even when the contract contains an omnibus statement that the written instrument embodies the whole agreement, or that no representations have been made, a party may escape liability under the contract by establishing that he was induced to enter the contract by fraud. Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 320, 184 N.Y.S.2d 599, 601-02, 157 N.E.2d 597, 598-99 (1959) (Danann ); see also id. at 320-21, 184 N.Y.S.2d at 601-02 (citing, inter alia, Sabo v. Delman and Bridger v. Goldsmith ). 27 When, however, the contract states that a contracting party disclaims the existence of or reliance upon specified representations, that party will not be allowed to claim that he was defrauded into entering the contract in reliance on those representations. See Citibank, N.A. v. Plapinger, 66 N.Y.2d 90, 94-95, 495 N.Y.S.2d 309, 311, 485 N.E.2d 974, 976 (Plapinger ); Danann, 5 N.Y.2d 317, 320-21, 184 N.Y.S.2d 599, 602, 157 N.E.2d 597, 599. In Danann, the purchaser of a lease on a building sought damages for fraud, claiming that it had entered into the contract of sale as a result of the selling defendants' false representations as to the operating expenses of the building and as to the profits to be derived from the investment. Id. at 319, 184 N.Y.S.2d at 600, 157 N.E.2d at 598. The contract itself, however, stated that  '[t]he Seller has not made ... any representations as to the ... expenses [or] operation ... [of] the aforesaid premises ... and the Purchaser hereby expressly acknowledges that no such representations have been made ....'  Id. at 320, 184 N.Y.S.2d at 601, 157 N.E.2d at 598 (emphasis in Danann ). The contract also stated that all of the parties' understandings and agreements were merged in the contract,  'neither party relying upon any statement or representation, not embodied in this contract, made by the other.'  Id. (emphasis in Danann ). The Danann court, after noting that a general and vague merger clause would not bar parol evidence to support a fraud claim, ruled that the fraud claim in the case before it was barred by the purchaser's express disclaimer in the contract of any reliance on that specific representation. [P]laintiff has in the plainest language announced and stipulated that it is not relying on any representations as to the very matter as to which it now claims it was defrauded. Such a specific disclaimer destroys the allegations in plaintiff's complaint that the agreement was executed in reliance upon these contrary oral representations.... Id. at 320-21, 184 N.Y.S.2d at 602, 157 N.E.2d at 599. 28 In Plapinger, the court applied the Danann principle to an absolute and unconditional guarantee of a company's debts given by corporate officers in connection with an agreement by the plaintiff banks to restructure the company's indebtedness. The guarantee stated that its  'absolute and unconditional'  nature was  'irrespective of (i) any lack of validity ... of the ... Restated Loan Agreement ... or any other agreement or instrument relating thereto', or '(vii) any other circumstance which might otherwise constitute a defense' to the guarantee. Plapinger, 66 N.Y.2d at 95, 495 N.Y.S.2d at 312, 485 N.E.2d at 977. Following a default by the corporation, the banks brought suit to enforce the guarantee against the officers. The officers sought to defend by alleging that they had been induced to enter into the guarantee agreement by the plaintiff banks' fraudulent representation that the banks had committed themselves to providing the corporation an additional line of credit. 29 The Plapinger court, while confirming the traditional principle that a general merger clause is insufficient to bar a defense of fraud in the inducement, see id. at 94-95, 495 N.Y.S.2d at 311, 485 N.E.2d at 976, affirmed the dismissal of the guaranteeing officers' fraud defense on the ground that it was inconsistent with their specific recitals in the contract. First, though noting that the guarantee before it was not the explicit disclaimer present in Danann,  the Plapinger court observed that the guarantee was by no means a generalized boilerplate clause but rather was a multimillion dollar personal guarantee that was signed following extended negotiations between sophisticated business people. 66 N.Y.2d at 95, 495 N.Y.S.2d at 312, 485 N.E.2d at 977. 30 Second, the court found that the substance of the guarantee encompassed not only the financing agreements for the debtor corporation, but also  'any other agreement or instrument relating thereto,'  which included the guarantee itself. Id. Thus, the officers had agreed that their guarantee was absolute and unconditional irrespective of any lack of validity or enforceability of the guarantee, id. at 92, 495 N.Y.S.2d at 309, 485 N.E.2d at 974 (emphasis added), and irrespective of ... any other circumstance which might otherwise constitute a defense with respect to the guarantee, id. The court concluded that if it were to allow the officers to plead fraudulent inducement of the guarantee, it would in effect condone a fraudulent representation by the officers themselves of their own intentions vis-a-vis the guarantee. See id. at 95, 495 N.Y.S.2d at 312, 485 N.E.2d at 977; see also Danann, 5 N.Y.2d at 323, 184 N.Y.S.2d at 604, 157 N.E.2d at 600 (same). 31 Following Danann and prior to Plapinger, this Court noted that in order to be considered sufficiently specific to bar a defense of fraudulent inducement under Danann, a guarantee must contain explicit disclaimers of the particular representations that form the basis of the fraud-in-the-inducement claim. See Grumman Allied Industries, Inc. v. Rohr Industries, Inc., 748 F.2d 729 (2d Cir.1984). We stated that [t]he Danann rule operates where the substance of the disclaimer provisions tracks the substance of the alleged misrepresentations. 748 F.2d at 735. Given the Plapinger court's emphasis on the fact that the defendants there had negotiated an agreement in which they expressly waived any challenge to the validity of the guarantee itself, we are of the view that the ruling in Plapinger does not materially alter the principle established by Danann. 32 This view is supported by many state court decisions since Plapinger that have ruled that the mere general recitation that a guarantee is absolute and unconditional is insufficient under Plapinger to bar a defense of fraudulent inducement, and that the touchstone is specificity. Thus, where specificity has been lacking, dismissal of the fraud claim has been ruled inappropriate. See, e.g., Zaro Bake Shop, Inc. v. David, 176 A.D.2d 721, 721, 574 N.Y.S.2d 803, 804 (2d Dep't 1991) (mem.) ( 'absolutely and unconditionally' liable ... language, in and of itself, was ... insufficient to preclude ... proof of fraud in the inducement); DiFilippo v. Hidden Ponds Associates, 146 A.D.2d 737, 737-38, 537 N.Y.S.2d 222, 223-24 (2d Dep't 1989) (mem.) (contract provision not a bar to fraud-in-inducement claim where contract provision d[id] not specifically disclaim reliance on any oral representation concerning the particular matter as to which plaintiff now claims he was defrauded); GTE Automatic Electric Inc. v. Martin's Inc., 127 A.D.2d 545, 546-47, 512 N.Y.S.2d 107, 108 (1st Dep't 1987) (mem.) (recitation that underlying notes are absolute and unconditional does not bar proof of fraud in inducement of guarantee since there was not ... a specific disclaimer, as in both Plapinger and Danann Realty and, therefore, the principle of those cases does not apply); Goodridge v. Fernandez, 121 A.D.2d 942, 945, 505 N.Y.S.2d 144, 147 (1st Dep't 1986) (mem.) (defendant Fernandez, sued on his guarantee, not barred from asserting fraud-in-inducement defense because, in sharp contrast to the guarantee in [Plapinger ], [Fernandez's guarantee] contains no specific disclaimer of defenses available to the guarantor with respect to the guarantee). 33 Where the fraud claim has been dismissed, the disclaimer has been sufficiently specific to match the alleged fraud. See, e.g., Manufacturers Hanover Trust Co. v. Restivo, 169 A.D.2d 413, 414, 564 N.Y.S.2d 141, 141 (1st Dep't) (mem.) (claims that MHT representative fraudulently represented that [defendants'] guarantees were temporary and conditional upon MHT's advancing sufficient funds to consummate a business merger are barred by the language of the guarantees stating that they were continuing and unconditional  (emphasis added)), appeal dismissed, 77 N.Y.2d 989, 571 N.Y.S.2d 914, 575 N.E.2d 400 (1991); First City National Bank & Trust Co. v. Heaton, 165 A.D.2d 710, 711-12, 563 N.Y.S.2d 783, 783-84 (1st Dep't 1990) (mem.) (guarantee barred fraud-in-inducement defense that was in direct contradiction to the[ ] specific acknowledgement made in the guarantee); Marine Midland Bank, N.A. v. CES/Compu-Tech, Inc., 147 A.D.2d 396, 397, 537 N.Y.S.2d 818, 819-20 (1st Dep't 1989) (mem.) (contractual disclaimer in which defendant expressly waive[d] ... the right to assert defenses, setoffs and counterclaims ... in any action or proceeding in any court arising on, out of, under, by virtue of, or in any way relating to this Note or the transactions contemplated hereby  (emphasis added) was sufficiently specific to foreclose the defense of fraudulent inducement). But see Bank Leumi Trust Co. v. Block 3102 Corp., 180 A.D.2d 588, 589, 580 N.Y.S.2d 299, 300 (1st Dep't) (mem.) (The language of the guarantees specifies that they are absolute and unconditional, negating the claim of fraudulent inducement....) (precise language of guarantees not disclosed in opinion), appeal denied, 80 N.Y.2d 754, 587 N.Y.S.2d 906, 600 N.E.2d 633 (1992). 34 In the present case, Yanakas's Guarantee is, for the most part, significantly different from the guarantee at issue in Plapinger. First, there is no indication that the Yanakas Guarantee, which is in a preprinted form, is anything but a generalized boilerplate exclusion. The form was one that MHT apparently used routinely; an affidavit submitted by MHT's counsel in support of the Bank's motion to dismiss the affirmative defenses and counterclaims attached copies of an identical MHT guarantee form executed by others in connection with financing unrelated to ARM. There was no evidence that the scope or character of the Guarantee was the product of any negotiations between the parties. 35 More importantly, the Yanakas Guarantee does not purport to waive any defenses to its own validity. Rather, the Guarantee states that Yanakas absolutely and unconditionally guarantees all obligation[s] and liabilit[ies] of Borrower to Bank or another or others, and states that the guarantee shall be a continuing, absolute and unconditional guarantee of payment regardless of the validity, regularity or enforceability of any of said Obligations  (emphasis added). The term Obligations is explicitly defined in the Guarantee with reference only to obligations of ARM. Thus, the Yanakas Guarantee contains no disclaimer as to the validity, regularity, or enforceability of the Guarantee itself. It also contains no disclaimer of the existence of or reliance upon representations by MHT, no express reference to any promise of continued financing, and no blanket disclaimer of the type found in Plapinger as to any other circumstance which might otherwise constitute a defense to the Guarantee. 36 One of Yanakas's bases for claiming fraud in the inducement, however, is barred by the Guarantee. Yanakas alleged that the Bank had failed to disclose to him its same-day procurement of the $550,000 note signed by Buonincontri. The Guarantee, however, expressly covers ARM debts whether now existing or hereafter incurred, and expressly waives any and all notice of ... the creation ... of any of said Obligations. These terms are sufficiently specific to preclude any claim that the Bank defrauded Yanakas by failing to disclose the existence or imminence of the 1988 note. 37 In other respects, the Guarantee given by Yanakas does not, in words or substance, contain disclaimers of the representations that formed the basis of his claim of fraudulent inducement. Accordingly, the decision of the district court to dismiss the first three affirmative defenses and counterclaims must be vacated. The court's ruling that MHT was entitled to summary judgment against Yanakas, premised as it was on the dismissal of those defenses, must likewise be set aside.