Joseph Korff v. Hilton Resorts Corporation

Filing

OPINION filed : the district court's order dismissing Korff's claims for failure to state a claim upon which relief can be granted is REVERSED and the case is REMANDED for further proceedings, decision not for publication. Eric L. Clay, Circuit Judge; Jeffrey S. Sutton, Circuit Judge and Walter H. Rice, Authoring U.S. District Judge.,SDO

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NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 12a1230n.06
No. 11-3703
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT

FILED
JOSEPH J. KORFF,
Plaintiff - Appellant,
v.
HILTON RESORTS CORPORATION,
d/b/a HILTON GRAND VACATIONS,
Defendant - Appellee.

Before:

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Nov 28, 2012
DEBORAH S. HUNT, Clerk

ON APPEAL FROM THE UNITED
STATES DISTRICT COURT FOR
THE NORTHERN DISTRICT OF
OHIO

CLAY and SUTTON, Circuit Judges; and RICE, District Judge.*

RICE, District Judge. Joseph Korff appeals from the district court’s order granting Hilton
Resorts Corporation’s motion to dismiss under Fed. R. Civ. P. 12(b)(6). Korff maintains that he
was fraudulently induced to purchase a timeshare plan based on oral representations made by a
Hilton Resorts salesperson. The district court held that because the timeshare contract contained a
specific merger clause disclaiming all oral representations of any salesperson, extrinsic evidence of
those statements was inadmissible under New York law, and that Korff therefore failed to state a
claim upon which relief can be granted. Because we find that the district court erred in classifying
the clause as a specific merger clause, we reverse the judgment of the district court, and remand for
further proceedings consistent with this opinion.

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The Honorable Walter Herbert Rice, United States District Judge for the Southern
District of Ohio, sitting by designation.

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Korff v. Hilton Resorts Corp.
I.
In January of 2010, Korff, a business owner, attended a Hilton Resorts timeshare presentation
in New York City. He told the salesperson, Stephanie Abrams, that he was not interested in
purchasing a timeshare plan for himself, but would consider making a purchase if his employees
could use the plan to stay at Hilton properties at a reduced cost. Abrams told Korff that she owned
a timeshare in the same program, and she assured him that he could use the plan to save money on
his employees’ accommodations. According to Abrams, each point accumulated under the plan was
worth $1.00, and the cost of a hotel room was about $100 per night. Abrams stated that she would
be his sole point of contact for booking the rooms, and that his assistant could make the reservations.
In reliance on these statements, Korff purchased a timeshare plan for $99,900.
When Korff’s assistant first attempted to use the timeshare plan to book a hotel room for
Korff’s employees, however, she learned that a 3-day stay would cost several thousand points. She
was also told that she was not permitted to book rooms on Korff’s behalf. When Korff complained,
he learned that Abrams no longer worked for Hilton. A different Hilton representative told him that
the timeshare program he had purchased was not intended to be used in the manner described by
Abrams.
Korff filed suit, alleging four counts of fraud in the inducement. He claimed that Abrams
misrepresented that: (1) she was an owner in the program; (2) he could save a significant amount of
money on Hilton hotel rooms if he purchased the timeshare; (3) she would be the single point of
contact; and (4) Korff’s assistant would be able to book hotel rooms for his employees. Korff

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alleged that he justifiably relied on these statements to his detriment. He sought to rescind the
contract and asked for restitution and punitive damages.
Hilton filed a motion to dismiss under Fed. R. Civ. P. 12(b)(6), arguing that Korff had failed
to state a claim upon which relief can be granted. In support, Hilton cited the following merger
clause contained in paragraph 12(a) of the timeshare contract:
The “Contract Documents” consist of: (a) this Purchase Agreement; (b) the Deed; (c)
the Note and Mortgage; (d) the Statement of Understanding; and (e) any changes to
these documents. All changes must be in writing and each party who has any duty
under the change must sign them. The entire agreement between you and the Seller
will be contained in the Contract Documents. IT DOES NOT MATTER WHAT
YOU ARE TOLD OR SHOWN, OR WHAT YOU MAY TELL OR SHOW THE
SALESPEOPLE. ONLY WHAT IS WRITTEN IN THESE DOCUMENTS IS A
PART OF THE CONTRACT DOCUMENTS. YOU REALIZE: (1) OFTEN
PEOPLE DO NOT FULLY UNDERSTAND EACH OTHER, ESPECIALLY
WHEN THEY SPEAK AND DO NOT WRITE DOWN WHAT IS SAID AND (2)
THE SELLER IS NOT PRESENT TO HEAR AND CONTROL WHAT
SALESPEOPLE MAY TELL OR SHOW YOU. SINCE THE SELLER DOESN’T
KNOW AND CANNOT CONTROL EVERYTHING THAT IS SAID, AND TO
AVOID MISUNDERSTANDINGS, ALL OF THE AGREEMENTS BETWEEN
YOU AND THE SELLER ARE TO BE IN WRITING IN THE CONTRACT
DOCUMENTS. YOU AND THE SELLER AGREE THAT NO ONE HAS
PROMISED ANYTHING, EXCEPT WHAT IS WRITTEN IN THEM.
The “Statement of Understanding” further provided that “[y]ou should not rely upon any oral
representations as the basis for your purchase but rather only upon the purchase agreement and
attendant documents provided at purchase.” Hilton argued that because Korff had expressly
disclaimed reliance on any statements made by salespeople, he was barred from presenting extrinsic
evidence to support his claims of fraudulent inducement. The district court agreed.
Under New York law, which governs the claims pursuant to a choice-of-law provision in the
contract, the parol evidence rule generally bars proof of oral representations offered to refute the
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terms of a written, integrated contract. O’Hearn v. Bodyonics, Ltd., 22 F. Supp. 2d 7, 13 (E.D.N.Y.
1998). The rule, however, is “‘ineffectual to exclude evidence of fraudulent representations’ in an
action to rescind a contract or to recover loss sustained as a result of fraudulent inducement.” Cirillo
v. Slomin’s Inc., 768 N.Y.S.2d 759, 766 (N.Y. Sup. Ct. 2003) (quoting Sabo v. Delman, 143 N.E.2d
906 (N.Y. 1957)). In such cases, the admissibility of extrinsic evidence turns on whether the contract
contains a general merger clause or a specific merger clause. A general merger clause essentially
states that the parties acknowledge that the written agreement supersedes all prior agreements and
constitutes the entire agreement between them. It disclaims reliance on any and all prior oral
representations. When the contract contains a general merger clause, extrinsic evidence is
admissible to prove fraud in the inducement. Id.
In contrast, a specific merger clause disclaims reliance on specific prior oral representations.
When the contract expressly disclaims reliance on the same subject matter the plaintiff now claims
is fraudulent, extrinsic evidence is inadmissible to prove fraud in the inducement. Id. In Danann
Realty Corp. v. Harris, 157 N.E.2d 597, 599 (N.Y. 1959), the court explained that this is because
“[s]uch a specific disclaimer destroys the allegation in plaintiff’s complaint that the agreement was
executed in reliance upon these contrary oral representations.”
In Danann, for example, the plaintiff alleged that he was fraudulently induced to enter into
a commercial lease based on false representations concerning the operating expenses of the building
and the profits that could be derived from the investment. The contract, however, contained a
merger clause which expressly stated that the Seller had made no representations concerning the
“physical condition, rents, leases, expenses, [or] operation” of the premises and that the Purchaser
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acknowledged that no such representations had been made. Id. at 598. Because the merger clause
specifically and directly disclaimed reliance on the very subject matter the plaintiff now claimed was
fraudulent, the court concluded that the plaintiff could not present extrinsic evidence of the prior oral
representations. Id. at 600.
In Korff’s case, the district court found that the timeshare contract contained a specific
merger clause because “[r]ather than generally disclaiming reliance on all oral representations, Hilton
specifically disclaimed reliance on oral representations by the salesperson.” Then, quoting Danann,
the court found that Korff had “in the plainest language announced and stipulated that [he] is not
relying on any representations as to the very matter as to which [he] now claims [he] was defrauded.”
Citing Marine Midland Bank, N.A. v. Walsh, 689 N.Y.S.2d 288, 289 (N.Y. Sup. Ct. 1999), the
district court further found that even though the contract made no reference to the specific oral
representations that comprised the subject matter of Korff’s fraudulent inducement claims, the
language used was “sufficiently strong” to overcome any reliance on Abrams’ statements, and that
extrinsic evidence of those statements was therefore barred by the parol evidence rule. The court
dismissed Korff’s claims, concluding that because evidence of the alleged fraud was inadmissible,
Korff failed to state a claim upon which relief can be granted. Korff appealed.
II.
We review de novo the district court’s order granting Hilton’s motion to dismiss under Fed.
R. Civ. P. 12(b)(6) for failure to state a claim upon which relief can be granted. Inge v. Rock Fin.
Corp., 281 F.3d 613, 619 (6th Cir. 2002). We conclude that the district court erred in granting that

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motion because, in classifying the provision at issue as a specific merger clause, the court incorrectly
applied New York law.
As the court explained in Danann, a specific merger clause disclaims reliance on
representations concerning the very same subject matter that forms the basis of the fraudulent
inducement claim. 157 N.E.2d at 599. Under New York law, “a merger clause must address ‘the
very matter as to which [the party] now claims it was defrauded’ in order to bar introduction of parol
evidence to prove the alleged fraud.” Icebox-Scoops v. Finanz St. Honore, B.V., 676 F. Supp. 2d 100,
112 (E.D.N.Y. 2009) (quoting Danann, 157 N.E. 2d at 599)). In other words, the contract “must
contain explicit disclaimers of the particular representations that form the basis of the fraud-in-theinducement claim.” Manufacturers Hanover Trust Co. v. Yanakas, 7 F.3d 310, 316 (2d Cir. 1993)
(interpreting New York law).
The relevant question is whether the “oral representations . . . directly contradict a specific
provision in the agreement.” Fierro v. Gallucci, No. 06-cv-5189, 2008 WL 2039545, at *13
(E.D.N.Y. May 12, 2008); see also Century Pacific, Inc. v. Hilton Hotels Corp., 528 F. Supp. 2d
206, 229 (S.D.N.Y. 2007) (the merger clause must expressly reference “a specific subject of prior
representations”); Caiola v. Citibank, N.A., 295 F.3d 312, 330 (2d Cir. 2002) (a disclaimer bars
extrinsic evidence only when its substance “tracks the substance of the alleged misrepresentation”);
Internet Law Library, Inc. v. Southridge Capital Mgmt., LLC, No. 01 Civ. 6600, 2005 WL 3370542,
at *4 (S.D.N.Y. Dec. 12, 2005) (a specific disclaimer must “speak directly to the matter at issue in
order to preclude a claim of fraud in the inducement”).

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In this case, the oral representations on which Korff allegedly relied concerned Abrams’
ownership in the same timeshare program, Korff’s ability to use the timeshare program to save
money on hotel rooms, Abrams’ role as Korff’s sole point of contact, and the ability of Korff’s
assistant to book rooms on his behalf. Not one of these topics is addressed in the merger clause.1
Instead, the merger clause broadly disclaims reliance on any “oral representations by the
salesperson.”
Because the disclaimer does not address the specific subject matter that forms the basis for
Korff’s claims, it must be construed as a general merger clause under New York law. The fact that
it disclaims reliance only on those statements made “by the salesperson” does not change anything.
In fraudulent inducement cases, the oral representations at issue are quite often made by a
salesperson or some other company representative. In determining whether the merger clause is
general or specific, the relevant question is not who made the oral representation, but rather whether
the substance of the oral representation and the disclaimer “address common topics.” See Wall v.
CSX Transp., Inc., 471 F.3d 410, 417 (2d Cir. 2006) (interpreting New York law).
A very similar clause was at issue in Cirillo v. Slomin’s Inc., 768 N.Y.S.2d 759 (N.Y. Sup.
Ct. 2003), making that case particularly instructive. There, homeowners purchased a home alarm

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Hilton notes that although Korff alleges that Abrams told him that the timeshare
program could be used to save money on hotel rooms for his employees, paragraph 13 of the
Statement of Understanding specifically states that the purchase should be based on “personal
vacation use and enjoyment and not with an expectation of financial or monetary advantage . . .”
The remainder of the quotation, however, defines “financial or monetary advantage” to include
“rental income,” or “price appreciation through resale or tax advantage.” It makes no mention of
any expectation of financial advantage when the purchaser uses his accumulated points to save
money on hotel rooms for his or her employees.
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system based on numerous statements made by the salesperson. The salesperson generally discussed
the alarm system’s fail-safe nature and told them that it would not be compromised even if the
telephone wires were cut. This proved to be a false statement. The system failed to operate when
a burglar cut the telephone lines and broke into their house. The homeowners filed suit, alleging
fraudulent inducement.
The contract at issue stated that it constituted the “full understanding of the parties” and that
there were “no oral Agreements, understandings or representations between the parties.” It also
stated that “[t]he salesman has no authority to change any terms or make representations other than
contained in this Agreement, and the buyer represents that none have been made to or relied upon
by the Buyer.” Id. at 766. The court found that these were general disclaimers because they did “not
identify any particular subject matter, let alone the very matter as to which plaintiffs claim they were
defrauded.” Id.
In addition to these general disclaimers, however, the contract also stated that the company
made no representation that the alarm system may not be “circumvented, compromised, or defeated.”
The court found that this was a specific disclaimer that directly contradicted the salesperson’s
statement that the alarm system would work even if the telephone lines were cut. Interestingly
enough, the court allowed the homeowners to present extrinsic evidence of that statement anyway.
Id. at 767. The court noted that, unlike Danann, which involved an arms-length transaction between
sophisticated business people, this was a consumer transaction involving a boilerplate contract. The
court found that “the consumer must be afforded more protection and the reality of his contractual
statements must be examined more closely.” Id.
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Upon whom or what else is the consumer supposed to rely? The merchant
presumably trains and presents its salespersons to consumers for purposes of
providing them with information about the company's product or service. Such
merchant cannot be permitted to escape all responsibility for the information
provided simply by including a disclaimer of authority in a form contract. It cannot
cloak its agents with authority on the one hand, and then deny it on the other.
Id. at 768. “If the allegations state with particularity the oral representations relied upon, together
with contextual facts, in sufficient detail to permit the court to gauge their inherent credibility, then
the plaintiff should be permitted to go forward with his proof, notwithstanding the existence of a
specific disclaimer in the contract form.” Id.
Hilton argues that Cirillo is inapplicable because Korff’s purchase was not a consumer
transaction. Rather, Korff purchased the timeshare plan with the intent of using it for business
purposes. But regardless of how Korff intended to use the plan, this was not an arms-length
transaction between two sophisticated business entities who were both represented by counsel.
Instead, this involved a standard, boilerplate contract, making it more akin to the consumer
transaction at issue in Cirillo. In any event, the court need not decide whether Korff’s timeshare
purchase was a consumer transaction or a business transaction. Regardless of the nature of the
transaction, the bottom line is that the contract contained a general merger clause rather than a
specific merger clause.
The district court found that the language of the disclaimer was “sufficiently strong to
overcome any claim of reliance on oral statements.” In so holding, the court erroneously relied on
Marine Midland Bank N.A. v. Walsh, 689 N.Y.S.2d 288 (N.Y. Sup. Ct. 1999). The defendant in
Marine Midland Bank alleged that he had been fraudulently induced to execute a loan guaranty based

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on oral representations that, in exchange for the guaranty, plaintiff would release a mortgage held
on the property. The guaranty at issue was “absolute and unconditional” and specifically stated that
it “shall not be changed or affected by any representation, oral agreement, act or thing whatsoever.”
Id. at 289. It was intended to be “the final, complete and exclusive expression of the agreement.”
Id. The court held that, although the guaranty made no mention of the subject matter of the fraud
claim, i.e., the release of the mortgage, the substance of the guaranty was sufficient to destroy the
defendant’s allegation that the guaranty was executed in reliance on a contrary oral representation.
Id.
In support of this holding, the Marine Midland Bank court cited Citibank v. Plapinger, 485
N.E.2d 974 (N.Y. 1985), which involved an “absolute and unconditional” personal loan guaranty
of corporate officers. That guaranty was allegedly given in exchange for an oral agreement that the
bank would extend an additional multimillion-dollar line of credit to the corporation. It was
hammered out after “extended negotiations between sophisticated business people.” Id. at 977.
Moreover, it was an absolute guaranty irrespective of any lack of validity of the loan agreement and
of “any other circumstance which might otherwise constitute a defense.” Id. The court held that it
was “unrealistic in such circumstances to expect an express stipulation that defendants were not
relying on a separate oral agreement to fund an additional multimillion dollar line of credit, when
they themselves have denominated their obligation unconditional.” Id.
Marine Midland Bank and Plapinger do not apply to the facts of this case. The timeshare
contract does not contain any “absolute and unconditional” disclaimer, and it was not the result of
“extended negotiations between sophisticated business people.” Instead, it contains boilerplate
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language, generally disclaiming reliance on statements made by Hilton salespeople. In addition,
unlike the corporate officers in Plapinger, Korff did not agree to waive all defenses to the contract.
Under the circumstances presented here, the district court erred in holding that the language of the
disclaimer was “sufficiently strong” to disclaim all reliance on Abrams’ statements.
The Second Circuit Court of Appeals has held that “the ruling in Plapinger does not
materially alter the principle established by Danann.” Yanakas, 7 F.3d at 316. The “touchstone”
is still specificity. If the disclaimer at issue does not specifically disclaim reliance on the subject
matter that forms the basis for the claim of fraudulent inducement, dismissal of the claim is
inappropriate. Id. at 316-17.
Such is the case here. Because the merger clause at issue does not address the same subject
matter that forms the basis for Korff’s fraudulent inducement claims, it must be classified as a
general merger clause under New York law.

As such, evidence of Abrams’ alleged

misrepresentations is admissible to prove fraud in the inducement.
III.
For the reasons set forth above, we REVERSE the district court’s order dismissing Korff’s
claims for failure to state a claim upon which relief can be granted, and REMAND for further
proceedings consistent with this opinion.

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