Walls v. Vre Chi. Eleven, LLC
| Decision Date | 29 September 2016 |
| Docket Number | 16-CV-4048 |
| Parties | RAYMOND L. AND TERRYLL ANN WALLS, as Co-Trustees of the RAYMOND L. WALLS AND TERRYLL ANN WALLS DECLARATION OF TRUST DATED MAY 30, 2002, AS AMENDED JULY 18, 2013, Plaintiffs, v. VRE CHICAGO ELEVEN, LLC, VERDAD REAL ESTATE, INC., EXP REALTY ADVISORS, INC, and TARTAN REALTY GROUP, INC., Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
Thomas M. Durkin
The complaint in this case alleges fraudulent inducement and negligent misrepresentation against four Defendants for conduct during the purchase and sale of commercial property located in Cook County, Illinois. Jurisdiction is based on diversity of citizenship. R.1 ¶¶ 1-6; R. 18; R. 52. On June 6, 2016, two motions to dismiss were filed, one by Defendants VRE Chicago Eleven, LLC ("VRE") and Verdad Real Estate, Inc. ("Verdad"), R. 22, and another by Defendants EXP Realty Advisors, Inc. ("EXP") and Tartan Realty Group, Inc. ("Tartan"), R. 29. For the reasons that follow, both motions are denied.
A Rule 12(b)(6) motion challenges the sufficiency of the complaint. See, e.g., Hallinan v. Fraternal Order of Police of Chi. Lodge No. 7, 570 F.3d 811, 820 (7th Cir. 2009). A complaint must provide "a short and plain statement of the claim showing that the pleader is entitled to relief," Fed. R. Civ. P. 8(a)(2), sufficient to provide defendant with "fair notice" of the claim and the basis for it. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). This standard "demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). While "detailed factual allegations" are not required, "labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555. The complaint must "contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 570). "'A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.'" Mann v. Vogel, 707 F.3d 872, 877 (7th Cir. 2013) (quoting Iqbal, 556 U.S. at 678). In applying this standard, the Court accepts all well-pleaded facts as true and draws all reasonable inferences in favor of the non-moving party. Mann, 707 F.3d at 877.
Verdad is a large developer of commercial properties, which it leases to single tenants such as fast food restaurants. In 2014, Verdad acquired the property at issue in this case (the "Property") through VRE, its wholly-owned subsidiary. VRE paid $1,885,000 for the Property to the seller, which was an entity owned and/or controlled by Jason LeVecke. At the time of the sale, the Property was leased to a LeVecke entity, Frontier Star, LLC ("Frontier Star"), for operation as a KentuckyFried Chicken ("KFC") restaurant, under a lease dated in March 2014. Less than a year later, in February 2015, VRE and Frontier Star terminated the March 2014 lease, and VRE entered into a new lease with another LeVecke entity, MJC Holdings 123, LLC ("MJC"). The February 2015 lease was guaranteed by another LeVecke entity, Frontier Star 1, LLC ("FS1"), as well as by LeVecke personally. The February 2015 lease provided for payment of rent in the amount of $171,000 per year (for the first five years, and higher thereafter), which was substantially higher than the rent payable under the prior lease. Shortly after acquiring the Property, Verdad and VRE proceeded to offer it for sale at a price of 30 percent more than they had paid for it, marketing it to investors largely on the basis that it would generate rental income of $171,000 per year. Verdad and VRE also touted the fact that the February 2015 lease was guaranteed by FS1, and they circulated financial information representing that, as of 2014, FS1 had a net worth of $70 million and annual operating profits of $14.9 million. In addition, EXP and Tartan, acting as the sales and marketing agents for the Property, represented that there had been consideration of converting the KFC to a Hardee's restaurant, but since the Property was doing so well as a KFC, it was decided to continue to operate the Property as a KFC. When Plaintiffs sought financial statements and sales data related to the Property to verify these claims, EXP and Tartan falsely told Plaintiffs that doing so would violate the tenant's franchise agreement.
On March 24, 2015, Plaintiffs and VRE entered into a Purchase and Sale Agreement, pursuant to which Plaintiffs agreed to purchase the Property for$2,443,000. The sale closed on May 15, 2015. In August, a few months after the closing of the sale, MJC fell behind in its rent payments. On August 29, 2015, LeVecke wrote Plaintiffs that, as a consequence of the financial distress of his various entities, MJC could not pay more than $70,000 annual rent for the Property. In light of MJC's failure to perform its obligations as tenant under the February 2015 lease, Plaintiffs pursued legal action to regain possession of the Property and recover damages. They have now re-leased the Property, but the new tenant pays a substantially lower rent than that which they had expected under the February 2015 lease.
On or about July 27, 2015, Frontier Star filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. On November 17, 2015, FS1 filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. Verdad and/or VRE had a close and ongoing business relationship with Frontier Star, FS1, and/or LeVecke as of March 2015, having engaged in more than thirty transactions with one another, such that Verdad and VRE knew of Frontier Star's and its affiliated entities' precarious financial position and potential bankruptcy prior to the date on which VRE and Plaintiffs closed on the sale of the Property. Plaintiffs filed suit against VRE, Verdad, EXP, and Tartan on April 5, 2016. The complaint alleges that Plaintiffs were fraudulently induced into purchasing the Property by various misrepresentations and omissions of Defendants.
VRE and Verdad argue that Plaintiffs' claims are barred by a "no reliance" clause in the Purchase and Sale Agreement.1 The provision on which VRE and Verdad rely states in part as follows:
This type of contractual provision is known as a "no reliance" clause. "The purpose of a 'no reliance' clause is 'to head off a suit for fraud' [by] removing the reliance element necessary to state such a claim." In re Kindra Lake Towing, L.P., 2016 WL 3227303, at *2 (N.D. Ill. June 13, 2016) (quoting Extra Equipamentos E Exportacao Ltda v. Case Corp., 541 F.3d 719, 724, 733 (7th Cir. 2008)). Such clauses serve an important function under contract law, which is to "ensure[ ] that both the transaction and any subsequent litigation proceed on the basis of the parties' writings, which are less subject to the vagaries of memory and the risks of fabrication." Rissman v. Rissman, 213 F.3d 381, 384 (7th Cir. 2000). The concern ifno-reliance provisions are not enforced is that contracts "'would not be worth the paper on which they are written.'" Jacobson v. Hofgard, 2016 WL 837923, at *9 (D.D.C. Mar. 1, 2016) (applying District of Columbia law) (quoting One-O-One Enters., Inc. v. Caruso, 848 F.2d 1283, 1287 (D.C. Cir. 1988)) (citations and internal quotation marks omitted). While the Court acknowledges the strong policy reasons favoring enforcement of no-reliance clauses, it nevertheless believes dismissal of Plaintiffs' fraud and negligent misrepresentation claims at the pleading stage on this basis would be inappropriate for a number of reasons.
"Exculpatory clauses are not favored and are strictly construed and must have clear, explicit and unequivocal language showing that it was the intent of the parties." Zimmerman v. Northfield Real Estate, Inc., 510 N.E.2d 409, 415 (Ill. App. 1986).2 "This elevated requirement of precise language helps ensure that parties to a contract—even sophisticated parties represented by able attorneys—understand that . . . the contract may be binding even if it was induced by fraud." Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 336 (Tex. 2011) (applying Texas law) ( that nonreliance clause was not sufficiently clear and specific to preclude fraudulent inducement claim). Cases enforcing such clauses typically deal with express disclaimer language that "unambiguously covers the fraud that actually occur[red.]." MBIA Ins. Corp. v. Royal Indem. Co., 426 F.3d 204, 218 (3d Cir. 2005) (applying Delaware law) (emphasis added); see, e.g.,Rissman, 213 F.3d at 383 (); Billington v. Ginn-La Pine Island, Ltd., 192 So. 3d 77, 84 (Fla. App. 2016) (applying Florida law) ("We emphasize that the disclaimer clauses here are as clear and conspicuous as they are comprehensive.") (emphasis added); Cirillo v. Slomin's Inc., 768 N.Y.S.2d 759, 766 (N.Y. Sup. Ct. 2003) () (internal quotation marks and citation omitted) (emphasis added). The clause at issue here, however,...
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