Partners v. the Prudential Ins. Co. of Am.

• Decision Date: 15 April 2011
• Docket Number: No. 08–0989.,08–0989.
• Citation: 54 Tex. Sup. Ct. J. 822,341 S.W.3d 323
• Parties: ITALIAN COWBOY PARTNERS, LTD., Francesco Secchi and Jane Secchi, Petitioners,v.The PRUDENTIAL INSURANCE COMPANY OF AMERICA and Four Partners, LLC d/b/a Prizm Partners and d/b/a United Commercial Property Services, Respondents.
• Court: Texas Supreme Court

341 S.W.3d 323

54 Tex. Sup. Ct. J. 822

ITALIAN COWBOY PARTNERS, LTD., Francesco Secchi and Jane Secchi, Petitioners,

v.The PRUDENTIAL INSURANCE COMPANY OF AMERICA and Four Partners, LLC d/b/a Prizm Partners and d/b/a United Commercial Property Services, Respondents.

No. 08–0989.

Supreme Court of Texas.

Argued April 14, 2010.Decided April 15, 2011.

Luke Madole, Thomas Fenton Allen Jr., Carrington Coleman Sloman & Blumenthal, Ricardo Rochetti, Charles Josef Blanchard, Carrington Coleman Sloman & Blumenthal, Dallas, TX, for Italian Cowboy Partners, Ltd.G. Luke Ashley, John A. Mackintosh Jr., Richard Barrett Phillips, Jr., Thompson & Knight, L.L.P., Dallas, TX, for The Prudential Insurance Company of America.Justice GREEN delivered the opinion of the Court in which Chief Justice JEFFERSON, Justice WAINWRIGHT, Justice MEDINA, Justice JOHNSON, and Justice LEHRMANN joined.

We recognized decades ago that agreeing to a merger clause does not waive the right to sue for fraud should a party later discover that the representations it relied upon before signing the contract were fraudulent. See Dallas Farm Mach. Co. v. Reaves, 158 Tex. 1, 307 S.W.2d 233, 239 (1957) (quoting Bates v. Southgate, 308 Mass. 170, 31 N.E.2d 551, 558 (1941)). The principal issue in this case is whether disclaimer-of-representations language within a lease contract amounts to a standard merger clause, or also disclaims reliance on representations, thus negating an element of the petitioner's claim for fraudulent inducement of that contract. We conclude that the contract language in this case does not disclaim reliance or bar a claim based on fraudulent inducement. Accordingly, we reverse the take-nothing judgment of the court of appeals and remand the case to that court for further proceedings consistent with this opinion. We render judgment in favor of the lessee on its claim for rescission premised on breach of the implied warranty of suitability.

I. Facts

This dispute arose when Jane and Francesco Secchi, owners and operators of a restaurant, Italian Cowboy, terminated the restaurant's lease because of a persistent sewer gas odor.¹ In a suit against the landlord, Prudential Insurance Company of America, and the property manager, Prizm Partners, ² the Secchis sought to rescind the lease and recover damages for fraud and breach of the implied warranty of suitability. The landlord maintains that rescission is not warranted and seeks to recover for breach of contract.

The Secchis successfully owned and operated restaurants for more than twenty years. The Secchis identified Keystone Park, a Dallas shopping center owned by Prudential and managed by Prizm, as a possible site for a new restaurant, Italian Cowboy. Keystone Park housed three successful restaurants and had a vacant restaurant building available for lease. The Secchis began negotiating a potential lease of the vacant restaurant building with Prizm's property management director, Fran Powell.

During the lease negotiations, Powell told the Secchis that the building was practically new and had no problems. In particular, Francesco Secchi testified that Powell told him “the building was in perfect condition, never a problem whatsoever.” According to Secchi, Powell also said, “[T]his is my baby and I was here from the first day when they put the first brick until the last one. The size—it's in perfect condition. There is no problem whatsoever.... [It is] a perfect building.” Similarly, Jane Secchi testified that Powell told her that “this was a very new building and she had been present at the very beginning of this building and watched it all the way through,” that “[i]t was somewhat of her baby,” and that “there had been nothing wrong with the place at all.”

The lease with Italian Cowboy contained the following relevant provisions:

14.18 Representations. 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.

14.21 Entire Agreement. This lease constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and no subsequent amendment or agreement shall be binding upon either party unless it is signed by each party....

The Secchis began remodeling the property after signing the lease. During this time, the Secchis first heard that a severe odor had plagued Hudson's Grill, the previous tenant. Francesco Secchi testified that a nearby cinema manager had asked Ron Perry, Italian Cowboy's general contractor, if he knew of the problematic odor existing in the previous restaurant. Secchi stated that a few days later, “[a] guy with a motorcycle” stopped by the restaurant and said to “be very careful.... [There] used to be a place called Hudson's here and they used to serve excellent hamburgers, but there was a very, very bad odor.”

Upon hearing these statements, Francesco Secchi contacted Powell and specifically asked whether Hudson's Grill had experienced an odor problem. According to Secchi, Powell answered that she had been working with the building “all the time,” and that “[n]ever before” had there been a problem—this was the “first time” she heard something was wrong.

The sewer system subsequently backed up during the remodeling, and Francesco Secchi again contacted Powell. Secchi complained to Powell that there was an odor coming from several parts of the building. According to Secchi, Powell replied that she did not “know anything” about these issues. As renovations proceeded, the odor subsided.

However, a persistent odor—distinct from the earlier odor—materialized a few months later, a week before the planned “soft opening” of the Italian Cowboy restaurant. A cleanup crew removed a layer of hardened grease that had been blocking the inlet pipe to the grease trap, and a constant foul sewer gas odor became evident immediately. Francesco Secchi then contacted Powell again because “the odor started to come inside ... the restaurant” from the grease trap, which was located outside the restaurant building. Secchi told Powell they had a big problem, and he testified that on that day, Powell acknowledged that she smelled the odor, though she never admitted the same problem had occurred with Hudson's Grill.

Attempts to remedy the persistent sewer gas odor began immediately and continued for months. Perry and Powell inspected the plumbing and seals for leaks. Powell contacted Prizm's plumbers, Twin Cities, who replaced toilet rings in a restroom, and Powell authorized Perry to take out a wall, which Perry did. Perry then capped off a sink arm in the kitchen, Twin Cities installed new roof vents, and Powell and Perry examined parts along the bathroom wall corridor. The Secchis hired a trusted repair man, who “put [in] some extra pipes [to extend the sewer vents] to maybe get the odor out.” Powell also had camera tests of the plumbing lines conducted. Twin Cities attempted to correct the outflow lines running between the grease trap and the city's sewer system. The Secchis hired Lawton Mechanical Contractors, who continued efforts to remedy the odor by focusing on the grease trap, including its seals and covers. All of these attempts were unsuccessful.

In hopes that the foul odor would soon be remedied, the Secchis opened Italian Cowboy. The odor persisted, however, and the restaurant was unable to draw customers. At one point, the City of Dallas briefly shut down the restaurant following a customer's complaint to the health department. Secchi again complained about the odor to Powell, stating that “this is a very big problem.... You cannot operate a restaurant with an odor like that.”

Secchi contacted Powell again later and told her that “the odor was so terrible” that Italian Cowboy “couldn't carry on.” Powell then arranged for a smoke test to help identify the odor's source. After the test, Secchi asked Powell if those conducting the test had found anything and “[s]he said no.” Yet, Secchi testified that one of the men who conducted the test said, “I found three [smoke] bombs, but those, they're old bombs. They're not our bombs. Those had been put some time ago.”

Throughout this time, Powell continually denied knowledge of previous odor problems. However, the Secchis soon learned from a former manager of Hudson's Grill, Darla Wahl, and her husband, who had also worked at the restaurant, that the sewer gas odor was not only present during Hudson's tenancy and that attempts to remedy it at the time were also unsuccessful, but that Powell was aware of the odor at that time and had visited Hudson's Grill numerous times while the odor was present. Wahl testified that on the day of her and her husband's visit to Italian Cowboy as patrons, she “came back from the restroom and told [her husband] the smell is still there in the bathrooms,” and she confirmed the smell was noticeable “outside the restroom area” as well. Wahl mentioned the odor to one of the servers, at which point “Jane [Secchi] came over to the bar area and introduced herself” to the Wahls. Wahl then told Secchi that “the smell was there while I was at the restaurant when it was Hudson's Grill” and that Powell had been “present in the restaurant when the smell was there.” Wahl confirmed she spoke with Secchi regarding “how long the smell had been there,” “whether customers had complained about it,” “how often customers complained about it,” and the things that were done “to try to alleviate the smell.”

Upon receiving this information from the Wahls, the Secchis immediately ceased paying rent and closed the restaurant. Italian Cowboy then sued Prudential and Prizm, asserting claims for fraud, including both a theory of fraud in the inducement of the lease, as well as fraud based on later misrepresentations. Italian Cowboy further asserted claims for negligent misrepresentation, breach of the implied warranty...