Walid v. Yolanda for Irene Couture Inc., A-3112-10T4; Appellate Division; opinion by Kennedy, J.S.C., temporarily assigned; decided and approved for publication April 5, 2012. Before Judges Yannotti, Espinosa and Kennedy. On appeal from the Law Division, Morris County, L-3351-06. DDS No. 11-2-5802 [21 pp.]
Plaintiffs Anwar and Donna Walid learned that “Irene’s Bridal Shop,” owned by Yolanda for Irene Couture Inc. (YIC), the principal of which was Irene Paster, was for sale. Paster supplied a fact sheet that listed annual sales of $582,500 and an operating profit of $289,445. The Walids agreed to purchase the business for $700,000, subject to review by their accountant and attorney. They retained an attorney but elected not to use an accountant. Instead, prior to the closing, Anwar reviewed the bank deposit summaries, tax returns and pending purchase orders, profit and loss statements, compilation reports and bank statements that Paster supplied.
The business ultimately failed and the Walids filed a complaint against YIC, Paster, Michael Thomas and MGR Enterprises Inc. Thomas, through MGR, was the accountant who prepared the compilation reports and tax returns that Walid reviewed. The complaint asserted a claim for fraudulent inducement, alleging that income from Yolanda Couture Inc. (YC), a New York corporation owned by Paster, was deposited into YIC’s bank accounts to fraudulently overstate its income.
The trial judge found that receipts for YC were deposited into the YIC bank accounts, Paster knowingly and fraudulently represented YIC’s gross revenues, the misrepresentation was material, and Paster intended that plaintiffs rely on it.
However, the trial judge held that plaintiffs had not carried their burden of proof as to reasonable reliance and he dismissed the complaint. He appeared to hold that having elected not to use a business consultant to review the purported income before buying the business, plaintiffs were chargeable with knowledge that would have been readily apparent to an expert in the business, i.e., the income figures were inflated.
Plaintiffs appeal the dismissal and the denial of their motion for reconsideration.
Held: Plaintiffs proved by clear and convincing evidence that they justifiably relied on misrepresentations regarding the business’s income that induced them to enter into the contract and caused them to sustain damages. The general integration clause in the contract of sale does not bar the introduction of parol evidence to prove fraud in the inducement.
The panel observes that reasonable reliance is an essential element of common-law fraud. Although a buyer is entitled to rely on the seller’s statement concerning the business’s income, if the buyer undertakes an independent investigation and relies on that rather than the seller’s statements, there is no reliance as a matter of law.
The Restatement (Second) of Torts § 537 (1977), which accurately reflects the law in New Jersey, requires that there be “justifiable” reliance to recover on a claim of fraudulent misrepresentation. Reliance is not justified if the recipient of the misrepresentation knows that it is false or its falsity is obvious to him. Thus, a buyer experienced in a business may not be justified in relying on a misrepresentation regarding the business’s income whereas a purchaser inexperienced in the business might be justified in doing so.
Also, the Restatement says a recipient of a fraudulent misrepresentation is justified in relying on its truth although he might have ascertained its falsity had he made an investigation as there is no obligation to undertake an investigation.
Applying these principles, the panel holds that the trial judge’s conclusion that plaintiffs did not prove they justifiably relied on defendants’ misrepresentations is clearly mistaken and so plainly unwarranted that the interests of justice demand correction. He apparently imputed to the Walids knowledge about the finances of a bridal business that would only have been apparent to an expert or to one experienced in the business. However, they had no such expertise or experience and thus it would not have been obvious to them that the income figures for YIC were inflated.
Further, the panel says the facts do not support the conclusion that plaintiffs conducted an independent investigation precluding justifiable reliance on defendants’ misrepresentations. Anwar simply reviewed the financial documents given to him and was under no obligation to use an expert to examine the books and records of YIC.
Moreover, the fact that the income of YIC was inflated by deposits from another business would not have been obvious from the records given to plaintiffs. One is not precluded from recovering for a fraud by examining the records that contain the fraud.
Nor does the contract provision stating that plaintiffs were relying on their own evaluation and inspection of the business, not on any representations in the contract of sale, bar their recovery. Case law holds that a party to an agreement cannot, simply by a provision in the contract, create an absolute defense or prevent the introduction of parol evidence in an action based on fraud in the inducement.
A party perpetrating a fraud may not invoke a general integration clause to preclude evidence of earlier explicit misrepresentations if the misrepresentations are peculiarly within that party’s knowledge and were, in fact, intentionally misrepresented. Here, material misrepresentations were made to plaintiffs regarding the business’s income and then, in an effort to escape later liability, a contract was prepared with a general integration clause. In such a case, the introduction of extrinsic evidence to prove fraud in the inducement is a well-recognized exception to the parol evidence rule.
Paster and YIC are liable on plaintiffs’ fraud claim. The matter is remanded for a determination whether YC, Thomas and MGR Enterprises also should be liable to plaintiffs. Also to be determined are damages, punitive damages, counsel fees and costs.
— By Judith Nallin
For appellants Anwar Walid et al. — Thomas J. Hirsch. For respondents: Michael Thomas et al. — Raymond A. Grimes; Yolanda for Irene Couture Inc. et al. — Avrom R. Vann.