Walls v. VRE Chicago Eleven, LLC et al

Filing 55

MEMORANDUM Opinion and Order: For the foregoing reasons, defendants' motions to dismiss 22 29 are denied. Status hearing set for 10/7/2016 at 09:00 AM. Signed by the Honorable Thomas M. Durkin on 9/29/2016:Mailed notice(srn, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
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.

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16-CV-4048
Thomas M. Durkin

MEMORANDUM OPINION AND ORDER
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.
LEGAL STANDARD
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.
BACKGROUND
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 Kentucky

2

Fried 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

3

$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.

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ANALYSIS
A.

CONTRACTUAL DISCLAIMER LANGUAGE

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:
10.

CONDITION OF THE PROJECT

10.1 As Is Conveyance. EXCEPT FOR THOSE
REPRESENTATIONS AND WARRANTIES EXPRESSLY
MADE BY SELLER IN THIS CONTRACT OR ANY
CLOSING
DOCUMENTS,
PURCHASER
ACKNOWLEDGES THAT IT IS NOT RELYING ON ANY
REPRESENTATIONS
OR
WARRANTIES
WHATSOEVER BY SELLER OR ANY AGENT OR
EMPLOYEE THEREOF REGARDING THE PROJECT,
INCLUDING, WITHOUT LIMITATION, . . . .
R. 1-3 at 13.
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 if
EXP and Tartan do not raise this argument in their motion to dismiss, apparently
because they are not parties to the Purchase and Sale Agreement.

1

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no-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.
1.

AMBIGUITY IN THE NO-RELIANCE CLAUSE

“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) (holding 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.,
Interpretation of the Purchase and Sale Agreement is governed by Illinois law. See
R. 1-3 at 18 (Purchase and Sale Agreement, ¶ 14.5).

2

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Rissman, 213 F.3d at 383 (“Having signed an agreement providing for acceleration
as a consequence of sale, Arnold is in no position to contend that he relied on the
impossibility of sale.”); 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) (“plaintiff has, in
the plainest language announced and stipulated that it is not relying on any
representations as to the very matter as to which it now claims it was defrauded”)
(internal quotation marks and citation omitted) (emphasis added). The clause at
issue here, however, is ambiguous in a number of respects.
To begin with, Plaintiffs allege fraudulent omissions, not just fraudulent
misrepresentations. While Illinois law requires that a plaintiff prove justifiable
reliance for a claim of fraudulent concealment, the reliance element for a claim of
fraudulent concealment means reliance on the defendant’s silence. See Bauer v.
Giannis, 834 N.E.2d 952, 957 (Ill. App. 2005). The no-reliance contract clause in the
Purchase and Sale Agreement covers “representations or warranties” made by the
seller, and does not refer to silence or omission by the seller. The Illinois Appellate
Court has suggested that a fraudulent concealment claim is not barred by a noreliance clause if that clause does not expressly encompass omissions. See Benson v.
Stafford, 941 N.E.2d 386, 410 (Ill. App. 2010) (“the nonreliance clause in the case at
bar only applies to a ‘warranty, representation, opinion, advice or assertion of fact,’
indicating that it encompasses affirmative fraud and not fraudulent concealment,

7

which concerns silence in the face of a duty to speak”), cited in McMahan v.
Deutsche Bank AG, 938 F. Supp. 2d 795, 806 n.3 (N.D. Ill. 2013) (declining to decide
the issue on a motion to dismiss but noting that the wording of the disclaimer
clause “encompasses only affirmative fraud and not fraudulent concealment”).
The only reference to an “omission” the Court could find in the documents
attached to the complaint is in the sales brochure, which states:
Neither the Company nor any of their affiliates or
representatives makes any representation or warranty,
express or implied, as to the accuracy or completeness of
the information contained herein or any other written or
oral communication transmitted or made available to any
recipient. The Company and their respective affiliates and
representatives expressly disclaim any and all liability
based, in whole or in part, on such information, errors
therein or omissions there from.
R. 1-1 at 2 (emphasis added). There is no indication in the complaint, however, that
Plaintiffs signed the sales brochure or otherwise agreed to be bound by it. Moreover,
the reference to omissions in the sales brochure is in what appears to be a
disclaimer-of-liability clause (as opposed to a no-reliance clause). See id. (“The
Company and their respective affiliates and representatives expressly disclaim any
and all liability . . .”). A disclaimer of liability clause might not be enforceable under
Illinois law. See Benson, 941 N.E.2d at 409 (distinguishing between clauses that
target reliance and clauses that release a party from liability for intentional torts,
noting that the former are enforceable while the latter “would be void”); see also
Eisenberg v. Goldstein, 195 N.E.2d 184, 186 (Ill. 1963) (“[o]ne who by
misrepresentation has induced another to act to his prejudice cannot relieve himself
of liability by a mere disclaimer thereof in advance”).
8

Second, the Purchase and Sales Agreement is ambiguous as to whether the
no-reliance clause was intended to apply to the subject matter of Plaintiffs’ claims
in this case. See Giger v. Ahmann, 2013 WL 6730108, at *8 (N.D. Ill. Dec. 20, 2013)
(“misrepresentations regarding facts that are outside the terms of the written
contract are not covered by a contract’s ‘no-reliance’ clause”). Plaintiffs argue that
the subjects underlying their claims—principally, the financial condition of the
lease guarantor and whether the Property could be expected to generate rent
payments of a certain sum on a sustained basis—are not issues addressed in the
Purchase and Sale Agreement. The no-reliance clause is limited to “representations
or warranties . . . regarding the Project.” R. 1-3 at 13 (emphasis added). As Plaintiffs
point out, “the Project” is defined in the Agreement as the “real and personal
property” enumerated therein, including “the Seller’s right, title and interest in and
to” the tenant lease on the real property (1.5). R. 1-3 at 1, 2. While Plaintiffs’ claims
relate to the tenant lease, it could be said that they do not relate to the Seller’s
“right, title and interest in and to” the tenant lease. VRE and Verdad respond that
the words “right, title and interest in and to” are irrelevant to the coverage issue.
The Project, they argue, includes the lease, and therefore the no-reliance clause
applies broadly to any representations and warranties “regarding” the lease, period.
The Court, however, will not ignore language in the contract in order to construe
the nonreliance clause in favor of enforcement when there are serious allegations of
intentional fraud. Plaintiffs argue, based on the contract language “Seller’s right,
title and interest in and to,” that the no-reliance clause encompasses only

9

representations and warranties related to the Seller’s legal right to collect rents, as
opposed to representations and warranties about the economic value of those rents
to the owner of that legal right. That is at least a plausible interpretation of the
Purchase and Sale Agreement.
Another ambiguity about the coverage of the no-reliance clause arises from
the surrounding contractual language. It is a well established rule of construction
that words must be construed in context, which means including the surrounding
words. See Gallagher v. Lenart, 874 N.E.2d 43, 58 (Ill. 2007) (“[B]ecause words
derive their meaning from the context in which they are used, a contract must be
construed as a whole, viewing each part in light of the others. The intent of the
parties is not to be gathered from detached portions of a contract or from any clause
or provision standing by itself.”) (citations omitted). The no-reliance clause appears
in a section of the Purchase and Sale Agreement (10.1) that is labeled “As Is
Conveyance.” As a matter of contract construction, the first part of § 10.1 (the “noreliance” language) must be interpreted in context, which means taking into
account the “as is” language that follows. Here is the complete text of the provision
in question, with the “as is” language in bold:
10.

CONDITION OF THE PROJECT

10.1 As Is Conveyance. EXCEPT FOR THOSE
REPRESENTATIONS AND WARRANTIES EXPRESSLY
MADE BY SELLER IN THIS CONTRACT OR ANY
CLOSING
DOCUMENTS,
PURCHASER
ACKNOWLEDGES THAT IT IS NOT RELYING ON ANY
REPRESENTATIONS
OR
WARRANTIES
WHATSOEVER BY SELLER OR ANY AGENT OR
EMPLOYEE THEREOF REGARDING THE PROJECT,
10

INCLUDING, WITHOUT LIMITATION, ITS PHYSICAL
CONDITION,
ITS
SUITABILITY
FOR
ANY
PARTICULAR PURPOSE, ITS COMPLIANCE WITH
LAWS,
INCLUDING,
WITHOUT
LIMITATION,
ENVIRONMENTAL LAWS, OR THE PRESENCE OR
ABSENCE OF CHEMICALS, TOXIC OR HAZARDOUS
SUBSTANCES,
MATERIALS
OR
WASTES
THEREUPON, AND SELLER EXPRESSLY DISCLAIMS
ANY AND ALL SUCH REPRESENTATIONS AND
WARRANTIES, EXPRESS OR IMPLIED, EXCEPT FOR
ANY LIMITED WARRANTIES CONTAINED HEREIN
AND THE SPECIAL WARRANTY OF TITLE TO BE
CONTAINED IN THE DEED TO BE DELIVERED AT
THE CLOSING. PURCHASER SHALL ACCEPT THE
PROJECT IN ITS ‘AS IS”, “WHERE IS”, “WITH ALL
FAULTS” CONDITION, AND SELLER HEREBY
DISCLAIMS
ANY
WARRANTY
OF
MERCHANTABILITY
OR
FITNESS
FOR
A
PARTICULAR PURPOSE, EXPRESS OR IMPLIED.
AFTER CLOSING, SELLER SHALL BE UNDER NO
OBLIGATION WHATSOEVER TO UNDERTAKE ANY
REPAIR, ALTERATION, REMEDIATION OR OTHER
WORK OF ANY KIND WITH RESPECT TO ANY
PORTION OF THE PROJECT.
R. 1-3 at 13-14.
Viewed in light of the surrounding language, the no-reliance clause in the
first sentence of § 10.1 arguably relates only to representations or warranties
pertinent to the “as is” portion of § 10.1. Those representations and warranties
appear to be limited to defects in the physical condition of or title to the real
property. The heading or title of the section (“CONDITION OF THE PROJECT . . .
As Is Conveyance”) seems to confirm this interpretation. VRE and Verdad counter
that the Agreement contains a provision (14.8) stating that “section titles or
captions . . . are for convenience only and shall not be deemed to be part of this
Contract.” R. 40 at 3. But interpreting the no-reliance clause as being limited by the
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“as is” language does not depend merely on the heading or title itself. A factfinder
reasonably could conclude that the language of § 10.1 even beyond the title, when
read in its entirety and taken in context, suggests that the provision has to do with
the physical condition of or title to the real property.
Finally, the no-reliance clause contains an exception to its application: it
states that the purchaser acknowledges it is not relying on any representations or
warranties “EXCEPT FOR THOSE REPRESENTATIONS AND WARRANTIES
EXPRESSLY MADE BY SELLER IN THIS CONTRACT OR ANY CLOSING
DOCUMENTS.” R. 1-3 at 13 (emphasis added). VRE and Verdad replace the last
part of this sentence with the words “EXCEPT FOR THOSE REPRESENTATIONS
AND WARRANTIES SET FORTH IN SECTION 8.2 OF THIS CONTRACT,” R. 23
at 7, likely because none of the representations or warranties contained in § 8.2
have any relevance to Plaintiffs’ claims in this case. But the actual language of the
agreement preserves all representations and warranties made by the seller “in this
contract or any closing document,” not just those “set forth in section 8.2.” It is
possible, therefore, that a representation or warranty made in a provision of the
Purchase and Sale Agreement other than in § 8.2, or one made in a closing
document, might apply here. See Zimmerman, 510 N.E.2d at 415 (“[T]he
exculpatory language in question does not include ‘such representations [which] are
in writing.’ Thus, the representations regarding lot size which were made in the
multiple listing sheet and in the sales contract are not included under the
exculpatory clause.”). Exhibit 2.3 to the Agreement (R. 1-3 at 22) lists the due

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diligence materials provided by the seller to Plaintiffs, and includes a copy of the
tenant lease. Plaintiffs’ claims in this case relate to the rent amount shown on the
tenant lease, which allegedly was artificially inflated for purposes of fraudulently
inducing Plaintiffs to purchase the Property. The Court cannot determine at this
stage whether Plaintiffs have a fraud claim based on that document, but, if they do,
then the no-reliance clause might not apply because the lease appears to be
included in the closing documents.
In sum, the meaning and applicability of the no-reliance clause is ambiguous,
making the issue currently before the Court inappropriate for resolution on a
motion to dismiss. The Court declines to interpret the no-reliance clause as a matter
of law based solely on the language cited by VRE and Verdad read in isolation from
any other language in the agreement and without consideration of the parties’
contractual intent and surrounding circumstances. 3
VRE and Verdad also cite to other paragraphs in § 10.1 of the Purchase and Sale
Agreement in support of their view as to the proper meaning and construction of the
no-reliance clause. For instance, they cite to the third paragraph in § 10.1, which
provides that:

3

Purchaser acknowledges that it is a sophisticated real
estate investor who shall have had, as of the closing date,
open access to, and sufficient time to review, all
information, documents, agreements, [etc.] . . .
R. 1-3 at 14 (§ 10.1). Nothing in this provision, however, excuses VRE and Verdad
from liability for fraud. They also cite to the first part of the fourth paragraph in
§ 10.1, which states that:
Purchaser shall undertake such investigation as shall be
required to make Purchaser fully aware of the condition of
the Project, including . . . all facts, circumstances and
information which may affect the use and operation of the
Project . . . .
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2.

ENFORCEABILITY OF The NO-RELIANCE CLAUSE

Even if the no-reliance clause was unambiguous, the Court still would have
to address the issue of its enforceability. The parties dispute whether the noreliance clause is enforceable as a matter of law. Plaintiffs argue that the clause is
an unenforceable “as is” clause because it appears under the heading “As Is
Conveyance.” See R. 37 at 14-15. Plaintiffs cite two cases which do support their
argument that “as is” clauses are unenforceable under Illinois law. See Napcor
Corp. v. JP Morgan Chase Bank, N.A., 938 N.E.2d 1181, 1187 (Ill. App. 2010) (“‘as
is’ language in a real estate sale contract does not shield a seller from liability for
fraud”) (internal quotation marks omitted); Bauer, 834 N.E.2d at 957-908 (same).
VRE and Verdad contend that the contracts at issue in Napcor Corp. and
Bauer have different language than the Purchase and Sale Agreement, and they
present a comparison chart to prove their argument. R. 40 at 4. But the chart is
somewhat misleading. In the first place, VRE and Verdad omit the “as is” language
from the Purchase and Sale Agreement, which is similar to the “as is” language in
the two Illinois cases. In addition, VRE and Verdad omit language from the
Purchase and Sale Agreement regarding representations and warranties that is
similar to the language they quote from the contracts in Bauer and Napcor Corp.
Compare R. 1-3 at 14 (§ 10.1) (“seller makes no representation or warranty as to the
truth, accuracy or completeness of any materials, data or other information
Id. This language by itself does not relieve VRE and Verdad from the consequences
of their own fraud because a party who fraudulently induces another to act cannot
“impute negligence to the other merely because of the latter’s reliance on the
misrepresentation.” Eisenberg, 195 N.E.2d at 186.
14

delivered by seller to purchaser in connection with the transaction contemplated
hereby”); with Napcor Corp. 938 N.E.2d at 1185 (“[plaintiff] agrees and admits that
no representations or statements have at any time been made by [defendant]”), and
Bauer, 834 N.E.2d at 956 (purchaser accepts the property “without any warranty or
representation on the part of the Seller”).
Instead of comparing the “no representations” language in the Purchase and
Sale Agreement to the “no representations” language in the contracts at issue in
Bauer and Napcor Corp., VRE and Verdad compare the no-reliance clause in the
Purchase and Sale Agreement to the “no representations” language in the latter two
cases. In effect, they are attempting to distinguish Bauer and Napcor Corp. because
the “as is” clauses at issue in those cases did not specifically use the word “rely” or
“reliance.” On the one hand, an unpublished decision by the Illinois Appellate Court
did in fact distinguish Bauer on this basis. See Martom Partners v. U.S. Bank, N.A.,
2015 IL App. (1st) 142398-U, at *4 (Ill. App. Sept. 23, 2015) (unpublished opinion).
On the other hand, this Court recently held that a contract clause that does not
specifically use the word “rely” or “reliance” can still function as a no-reliance
clause. In re Kindra Lake Towing, L.P., 2016 WL 3227303, at *2. The similarity
between the “no representations” language in the Purchase and Sale Agreement to
the “no representations” language in the contracts at issue in Bauer and Napcor
Corp., therefore, may be more relevant than the absence of the word “rely” or
“reliance” in the contracts at issue in the two Illinois cases.

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An examination of the Bauer opinion supports this view, because the result in
that case did not appear to turn on the absence of the word “rely” in the contract. In
fact, the defendant in Bauer argued that an “as is” clause, even without the word
“rely,” is the equivalent of a “disclaimer of reliance” clause. Bauer, 834 N.E.2d at
958. The Illinois Appellate Court did not disagree with that characterization, and,
instead, discussed Illinois cases where the contracts at issue included the word
“rely.” But the court distinguished that precedent not because the contracts at issue
included no-reliance language but because the fraud claims at issue were based on
oral representations outside the parties’ written agreements. According to the
Bauer court, enforcing the disclaimer clauses in those cases made sense because
“[p]lacing primacy on the written word is a primary function of [the] law and
reduces the possibility of faulty memories and fabrication.” Id. at 960 (internal
quotation marks and citation omitted) (citing Rissman, 213 F.3d at 384 (nonreliance
clause ensures 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”)). The court said that the case before it was different,
however, because the alleged fraud occurred in written disclosures made by the
defendant prior to the sales transaction.
A number of Illinois cases that have enforced exculpatory clauses since the
Bauer decision also rely to a large degree on the fact that the plaintiff in those cases
was attempting to use oral misrepresentations to overcome a written contract
disclaimer. See, e.g., Greer v. Advanced Equities, Inc., 964 N.E.2d 772, 778 (Ill. App.

16

2012) (limiting its holding “to a situation in which a purchaser of securities pursues
a common-law fraud claim based on alleged oral misrepresentations and there
exists an applicable written instrument that contains a nonreliance clause
disclaiming reliance on oral misrepresentations,” and “express[ing] no opinion on
any other scenario”); Schrager v. Bailey, 973 N.E.2d 932, 938 (Ill. App. 2012)
(distinguishing another Illinois case in which, “unlike the present case, the alleged
oral misrepresentation was set forth in [a] [written] settlement agreement”).
Similarly, the stated rationale for the Seventh Circuit’s decisions in Rissman, 213
F.3d at 385, and Extra Equipamentos E Exportacao Ltda, 541 F.3d at 724, turns on
a policy of favoring written contract clauses over uncertain and easily fabricated
pre-contractual oral representations. It is unclear whether Plaintiffs base their
claims in this case in any part on alleged oral misrepresentations; but the complaint
does make clear that at least some of the alleged misrepresentations are in the
written offering and sales brochure.
In addition, the Court must consider all of the surrounding circumstances in
deciding whether the no-reliance clause is enforceable. See, e.g., In re Kindra Lake
Towing, L.P., 2016 WL 3227303, at *3 (holding that justifiable reliance is normally
a question of fact). VRE and Verdad argue that the case law cited by Plaintiffs on
this point is outdated, and that courts now regularly dismiss cases on the pleadings
on the basis of no-reliance clauses without any factual inquiry into the surrounding
circumstances. R. 40 at 6. But the Court disagrees. The case law in this circuit,
including two previously cited decisions by this Court, In re Kindra Lake Towing,

17

L.P. and Giger, support the continued viability of Judge Rovner’s concurring view in
Rissman that “all of the surrounding circumstances [should be considered] in
determining whether reliance on a prior [representation] is reasonable, and [ ] the
existence of a non-reliance clause is but one factor, albeit a fairly convincing one in
many cases.” 213 F.3d at 388; see also Extra Equipamentos E Exportacao Ltda, 541
F.3d at 725 (“[S]ome courts . . . . require, before such a clause can be enforced, an
inquiry into the circumstances of its negotiation. . . . Whether Illinois would permit
or require such an inquiry we do not know, but will assume an affirmative
answer.”). 4
Circumstances that might be considered in determining the enforceability of
the no-reliance clause here include (1) the previously discussed lack of clarity
regarding the meaning of the provision; (2) the fact that Plaintiffs’ claims are at
least partly based on alleged written misrepresentations; (3) Plaintiffs’ allegations
that Defendants thwarted their due diligence investigation by falsely stating that
See, e.g., Typenex Co-Inv., LLC v. Solar Wind Energy Tower, Inc., 123 F. Supp. 3d
1017, 1028 (N.D. Ill. 2015) (“it is not clear that the law always gives effect to a noreliance clause, at least without further factual inquiry that cannot be undertaken
at this stage of the litigation”); Reis Robotics USA, Inc. v. Concept Indus., Inc., 462
F. Supp. 2d 897, 909-10 (N.D. Ill. 2006) (rejecting argument that Seventh Circuit
case law holds that fraud claims based on pre-contractual statements are
automatically barred where the contract contains a non-reliance provision);
Hartmarx Corp. v. JBA Int’l, Inc., 2002 WL 406973, at * 5 (N.D. Ill. Mar. 15, 2002)
(“the Seventh Circuit did not intend to reject outright all fraud claims involving
sophisticated parties and a non-reliance provision”). This is the approach of many
states other than Illinois as well. See, e.g., In re Nat’l Century Fin. Enters., Inc., Inv.
Litig., 905 F. Supp. 2d 814, 823 (S.D. Ohio 2012), aff’d sub nom. Pharos Capital
Partners, L.P. v. Deloitte & Touche, 535 Fed. App’x 522 (6th Cir. 2013); Barr v.
Dyke, 49 A.3d 1280, 1286-90 (Me. 2012); Italian Cowboy Partners, Ltd., 341 S.W.3d
at 337.

4

18

certain requested information could not be provided to Plaintiffs due to a
nondisclosure provision in the requested documents; 5 and (4) Plaintiffs’ allegations
that Defendants were involved in an orchestrated plan to deceive them and other
potential investors into believing the Property was a good investment when they
knew it was not. 6 In short, the Court concludes that whether Plaintiffs’ reliance on
the representations at issue in this case was reasonable remains a question of fact
notwithstanding the contract no-reliance clause. That question should be resolved
on a complete record after the parties have had an opportunity for discovery.
Because of this allegation, the Court cannot give definitive weight to a second “noreliance” clause, to which VRE and Verdad also cite, appearing in the second half of
the fourth paragraph in § 10.1:
5

Purchaser covenants and warrants to Seller that
Purchaser shall rely, except to the extent of Seller’s
representations and warranties contained hereunder, or
in any closing documents, solely on Purchaser’s own due
diligence investigation in determining to purchase the
Project.
R. 1-3 at 14 (§ 10.1). This no-reliance clause seems more directly applicable to
Plaintiffs’ claims than the first no-reliance clause on which VRE and Verdad
primarily rely. Nonetheless, it is tied to Plaintiffs’ due diligence efforts, and,
because Plaintiffs claim those efforts were hindered by Defendants’
misrepresentations concerning the availability of certain information, its
enforceability remains to be seen.
See, e.g., Abry Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1062
n.78, 1064 (Del. Ch. 2006) (“To the extent that the Stock Purchase Agreement
purports to limit the Seller’s exposure for its own conscious participation in the
communication of lies to the Buyer, it is invalid under the public policy of this
State.”) (citing, among other things, Richard A. Posner, ECONOMIC ANALYSIS OF LAW
§ 4.6 (5th ed. 1998) (discussing how “[t]he lie is different. The liar makes a positive
investment in manufacturing and disseminating misinformation. This investment is
completely wasted from a social standpoint . . .”)); see also Cousin Subs Sys. Inc. v.
Better Subs Dev. Inc., 2011 WL 4585541, at * 8 (E.D. Wis. Sept. 30, 2011)
(“Ingenious wrongdoers cannot immunize their wrongdoing from the law with a
single clause.”).
6

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B.

RULE 9(B)

Both sets of Defendants argue that the complaint should be dismissed for
failure to plead fraud with particularity as required by Federal Rule of Civil
Procedure 9(b). Rule 9(b) has been dealt with extensively in the law of this circuit.
The Court therefore will rely on the following well-stated summary of that law:
While the federal rules generally provide for liberal notice
pleading, Rule 9(b) requires that plaintiffs averring fraud
state with particularity the circumstances constituting
fraud. Specifically, Rule 9(b) requires plaintiffs to plead
the who, what, when, where, and how: the first paragraph
of any newspaper story, of the circumstances constituting
fraud. Rule 9(b) requires heightened pleading of fraud
claims in all civil cases brought in the federal courts,
whether or not the applicable state or federal law requires
a higher standard of proving fraud. This heightened
pleading requirement is a response to the great harm to
the reputation of a business firm or other enterprise a
fraud claim can do. Thus, [a] plaintiff claiming fraud or
mistake must do more pre-complaint investigation to
assure that the claim is responsible and supported, rather
than defamatory and extortionate.
While the circumstances constituting fraud must be
pleaded with particularity, a defendant’s [m]alice, intent,
knowledge [or] other condition of mind . . . may be averred
generally. In the Seventh Circuit, a plaintiff who provides
a general outline of the fraud scheme sufficient to
reasonably notify the defendants of their purported role in
the fraud satisfies Rule 9(b). [F]air notice is [p]erhaps the
most basic consideration underlying Rule 9(b). Further,
when details of the fraud itself are within the defendant’s
exclusive knowledge, specificity requirements are less
stringent. Under those circumstances, the complaint must
plead the grounds for the plaintiff’s suspicions of fraud.
Goldberg v. Rush Univ. Med. Ctr., 929 F. Supp. 2d 807, 814-15 (N.D. Ill. 2013)
(internal quotation marks and citations omitted).

20

VRE and Verdad argue that the complaint does not comply with Rule 9(b)
because it does not allege the specific individual(s) who made the representations.
VRE and Verdad do not cite any case law that holds that a complaint must be
dismissed unless it identifies the specific corporate employee responsible for each
alleged misrepresentation. See Davis v. Carter, 452 F.3d 686, 691-92 (7th Cir. 2006)
(perfunctory and undeveloped arguments that are not supported by pertinent
authority are waived.”). In any event, the complaint alleges that the false
statements in question were made in a brochure and offering circular that were
disseminated by EXP and Tartan, who were agents of VRE and Verdad. The
brochure and offering circular are attached to the complaint, and recite the names
of the specific individuals who were involved in the sale. In addition, the complaint
identifies by name the specific employee of EXP, who, as agent of VRE and Verdad,
allegedly lied about the identity of the present tenant of the Property, R.1, ¶ 26, as
well as the specific employee of VRE who represented by email to Plaintiffs or their
agent that Verdad had received rent each month for the past year from the current
tenant without disclosing that the lease amounts were less than under the current
lease, id. ¶¶ 29, 38a.
VRE and Verdad also assert that the complaint fails to sufficiently state
when and where the alleged misrepresentations were made. But they acknowledge
that the complaint specifies that the false statements were made in the sales
brochure and offering materials. Moreover, the complaint clearly identifies EXP and
Tartan, agents of VRE and Verdad, as being the parties who provided the brochure

21

and offering materials to Plaintiffs. R. 1, ¶ 21. Additional details which VRE and
Verdad complain are omitted, such as when the materials were provided to
Plaintiffs, can fairly be inferred from the allegations (they were provided by EXP
and/or Tartan prior to Plaintiffs entering into the sale transaction). Information
such as who drafted the brochure and offering materials is likely to be in the
exclusive possession of Defendants, although one can infer that Plaintiffs believe
Defendants are jointly responsible for their preparation and dissemination. Finally,
the Court does not agree with VRE and Verdad that the method by which the
alleged false representations were communicated is not alleged. Even assuming
that the “method of communication” must be specifically alleged (a proposition for
which VRE and Verdad provide no authority), the “method of communication” for
the majority of the false statements is alleged to be (1) statements made in the
written sales brochure and offering; (2) a communication with Plaintiffs’ agent on or
about March 19, 2015 (¶ 26); and (3) an email from an employee of Verdad on or
about April 21, 2105 (¶ 29).
The Court finds the Rule 9(b) arguments of Defendants EXP and Tartan to be
equally unpersuasive. To begin with, their reference to the “group pleading
doctrine” which the Seventh Circuit has “rejected” is inapposite. The term “group
pleading doctrine” refers to “a judicial presumption that statements in grouppublished documents including annual reports and press releases are attributable
to officers and directors who have day-to-day control or involvement in regular
company operations.” Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 702, 710

22

(7th Cir. 2008) (internal quotation marks and citation omitted). In the first place,
EXP and Tartan do not raise any issue regarding whether they can be held liable
for statements made by an employee. Therefore, the group pleading doctrine, and, it
follows, the Seventh Circuit’s rejection of it, are not relevant here. In any event, the
Seventh Circuit’s rejection of the group-pleading doctrine is based on the fact that it
“is inconsistent with the ‘strong inference’ requirement” applicable in securities
fraud suits. Id. The “strong inference” requirement is a special pleading rule for
securities class actions imposed by the Private Securities Litigation Reform Act of
1995 (“PSLR”). See 4 LAW SEC. REG. § 12:102 (2016); Pugh v. Tribune Co., 521 F.3d
686, 693 (7th Cir. 2008) (“The PSLRA provides that the complaint in a securities
fraud action must ‘with respect to each act or omission . . . state with particularity
facts giving rise to a strong inference that the defendant acted with the required
state of mind.’”) (citation omitted). This is not a securities fraud case, and therefore
the “strong inference” requirement is not implicated.
The more general “group pleadings” rule pertains to allegations of fraud
where the complaint does not explain the role of different defendants. But the
standard for such pleadings is whether they “provide fair notice to each individual
Defendant concerning the nature of his or her alleged participation in the fraud.”
Rocha v. Rocha, 826 F.3d 905, 911 (7th Cir. 2016). The Court finds that the
complaint is more than adequate in this regard. For instance, the complaint alleges
that EXP served as Verdad’s and/or VRE’s broker in their sale of the real property
at issue, and that Tartan served as the Illinois broker of record for EXP, VRE,

23

and/or Verdad. R. 1, ¶¶ 4, 5. The complaint further alleges that EXP and Tartan
marketed the property on behalf of VRE and/or Verdad through a brochure and
offering

circular

that

contained

false

and

misleading

information

and

representations. Id., ¶ 21. The specific nature of the allegedly false and misleading
statements in the brochure and offering circular is spelled out in three lengthy
paragraphs in the complaint. Id., ¶¶ 21, a, b, and c. The complaint alleges
additional allegedly false representations and omissions by EXP and Tartan in
other paragraphs. Id., ¶¶ 22, 23, 26, 29, 38. Many of these paragraphs identify not
just the corporate entity but specific individuals by name.
In support of their argument that the complaint improperly lumps together
all four Defendants., EXP and Tartan cite two paragraphs of the complaint
appearing under the heading of “Count I” and “Count II.” See R. 30 at 4 (quoting
¶¶ 41 and 49 of the complaint). But EXP and Tartan fail to acknowledge that other
paragraphs found in the section of the complaint entitled “Facts Common To All
Counts” provide greater specificity of the general allegations contained in the
paragraphs cited by EXP and Tartan. The Court already has discussed some of
those specific allegations, which are more than adequate to provide EXP and Tartan
with notice of the allegedly fraudulent conduct for which they are being sued,
independent of the allegedly fraudulent conduct of VRE and Verdad. EXP and
Tartan are put on notice of their specific role in the alleged fraudulent scheme by
these specific allegations. There is nothing wrong with setting forth the specific role
in the fraudulent scheme allegedly played by VRE and Verdad in the background

24

section of the complaint and then referring collectively to Defendants in the
conclusory paragraphs under the specific counts which incorporate those earlier
paragraphs. In fact, this method of pleading results in a well organized and
readable complaint.
CONCLUSION
For the foregoing reasons, Defendants’ motions to dismiss, R. 22, 29, are
denied.
ENTERED:
___

Dated: September 29, 2016

25

Honorable Thomas M. Durkin
United States District Judge