Page Title

Text Box: This case reminds us of the importance of clearly outlining the requirements for closing and the parties responsible for each requirement, as well as keeping all parties updated as to the status of all prerequisites to closing. This case is cited as Olyaie v. General Electric Capital Business Asset Funding Corporation, 2007 WL 57562 (9th Cir.(Cal)). Merger Clause Bars Fraud Claim The Georgia Court of Appeals held that a merger clause in a purchase agreement barred claims of fraud based on false oral assurances and failure to disclose. Florida Commercial Exchange and its principal, David McQuary, entered into a purchase agreement with Donchi, Inc. to buy Donchi’s golf course and surrounding property for $2,250,000. The majority of the financing for the purchase was provided by Robdol, Inc., although McQuary was conveying his Florida beach house to Donchi, Inc. in lieu of $300,000. The purchase agreement executed by all parties included a merger clause which provided, “there are no agreements, promises, or understandings between the parties except as specifically set forth herein. No alterations or changes shall be made to the contract except those in writing, signed, initialed and dated by all parties.” At the closing, Robdol funded its portion of the purchase, and McQuary executed a warranty deed conveying the beach house. A month later, Donchi learned that the beach house had been foreclosed upon and sold. Donchi sued McQuary, Florida Commercial Exchange and Robdol claiming fraud, breach of contract and unjust enrichment. The trial court dismissed the case against Robdol, and Donchi appealed. The Court of Appeals noted that the party alleging fraudulent inducement in entering a contract has two options: (1) affirm the contract and sue for damages from fraud or breach or (2) rescind the contract and sue in tort for fraud. Because Donchi did not rescind the contract in its claims, the purchase agreement was read with the understanding that it was being affirmed and Donchi was suing for damages. Donchi’s claims are based on two arguments: (1) fraud from oral assurances, and (2) fraud from failure to disclose. As to the first claim, the Court found that the merger clause in the purchase agreement was applicable and that it on its face barred Donchi’s claim that Robdol committed fraud by making false oral statements with regards to mortgage of the beach house. Robdol argued that fraud voided the merger clause provision, however, the Court stated that this would only be the case if there was mutual mistake involved, which was not the case here. Donchi’s second argument is that Robdol committed fraud by failing to disclose the fact that the beach house was being foreclosed upon. The Court found that concealment of material facts is only fraud in the instance that the opposing party could not discover the concealed facts through ordinary care. In this instance, Donchi admitted that it did not check on the status of the mortgage and did not try to record its warranty deed prior to learning of the foreclosure. This case illustrates importance of a thorough due diligence examination for all loan and purchase transactions. In the above case, a simple title search would have alerted the seller to the status of the current mortgage and the potential of foreclosure. Lenders should use ordinary care and confirm all information provided by the potential borrowers.