Gist Of The Action Doctrine Does Not Preclude Fraud In Inducement Claim
Written by: Alan Nochumson
A recent decision handed down by the state Superior Court in Mirizio v. Joseph stresses the importance of placing the terms of real estate investments in writing rather than relying on the proverbial handshake.
In Mirizio, a brother-in-law, real estate attorney Stephen Mirizio, and sister-in-law, Cathy Joseph, found themselves involved in a condominium development project.
Mirizio entered into an agreement to purchase real estate consisting of land and a warehouse building as part of the condominium development project.
According to Mirizio, the opinion said, he had a casual conversation with Joseph in which he offered her the opportunity to purchase one of the condominium units he had intended to develop on the property in return for one-half the cost of acquiring and developing the property. In contrast, Joseph contended that they had verbally agreed that they would jointly purchase the building and side lots.
Mirizio purchased the property and placed it in his and his wife’s name.
Soon after the construction work commenced, Joseph sent Mirizio a check in the amount of $40,000, which he accepted and placed into his attorney escrow account, the opinion said. According to Mirizio, he never asked for any money because he could not provide her with an agreement of sale until the condominium documents were completed.
Afterwards, Joseph engaged the services of several contractors, who worked on the building to make it suitable for her purposes. At the same time, the opinion said, she also made several significant payments to Mirizio. She also began storing some of her equipment in the building as well.
After Mirizio filed the declaration converting the property into two condominium units, he provided her with a proposed agreement of sale for one of the condominium units. The purchase price for the condominium unit equaled one-half of the acquisition costs and the common repair and renovation costs for the building as well as interest for the amount so advanced.
Joseph then questioned why the transaction excluded the side lots and why she was being charged for interest.
According to the opinion, Mirizio ultimately put his foot down and said she could sign the “agreements or not.”
In response, Joseph signed the agreement and made a last payment in full for the amount Mirizio claimed was due. On her check, she indicated that it was “payoff for building.”
Mirizio then returned the funds he had accepted from her and the check he had not cashed and offered her continued occupancy as a tenant only, the opinion said. He subsequently initiated an action in ejectment against her seeking possession of the property.
Joseph then filed a counterclaim against him for, among other things, breach of the joint venture agreement, breach of fiduciary duty, and for fraud and misrepresentation.
At the summary judgment stage, the trial court found that the statute of frauds barred the specific performance of the verbal agreement entered into between the parties regarding the sale of the real estate. In doing so, the trial court dismissed her claim for breach of contract and awarded him judgment on his ejectment claim.
The trial thus proceeded on the breach of contract, breach of fiduciary duty and fraud and misrepresentation claims.
Mirizio then tried unsuccessfully to have the fraud and misrepresentation claims dismissed as being barred by the gist of the action doctrine. Mirizio filed a motion in limine seeking to preclude evidence thereof, which was denied. At the close of Joseph’s case, Mirizio moved for a directed verdict, which the trial court denied. Finally, after the jury’s verdict in Joseph’s favor, Mirizio filed a motion for judgment notwithstanding the verdict, which the trial court also denied.
On appeal, he claimed that the trial court erred as a matter of law in not entering a judgment notwithstanding the verdict in his favor.
In Pennsylvania, the Superior Court said, the gist of the action doctrine is “designed to maintain the conceptual distinction between breach of contract claims and tort claims. As a practical matter, the doctrine precludes plaintiffs from recasting ordinary breach of contract claims into tort claims.”
The “central analysis is whether the tort claim is based on contractual duties, or conversely, whether the contract is collateral to a tort claim that is based on duties imposed by ‘larger social policies embodied in the law of torts.'”
According to the Superior Court, “The cases seem to turn on the question of whether the fraud concerned the performance of contractual duties. If so, then the alleged fraud is generally held to be merely collateral to a contract claim for breach of those duties. If not, then the gist of the action would be the fraud, rather than any contractual relationship between the parties.”
The trial court in Mirizio ruled that the fraud and misrepresentation claim was not barred by the gist of the action doctrine because a fiduciary duty existed between the parties. The trial court stated: “It is the joint venture agreement that creates fiduciary duties that are distinct from the contractual duties contained in the joint venture agreement and thus not barred by the gist of the action doctrine.”
The Superior Court was not persuaded that the fraud and misrepresentation claim was related to the fiduciary duty between the parties. Instead, the Superior Court emphasized that the trial court conflated the claims for breach of fiduciary duty and fraud and misrepresentation together, “where in fact these are two separate and distinct claims.”
In reaching its conclusion, the Superior Court reasoned that there was no basis to believe that the fraud and misrepresentation claim arises from Mirizio’s fiduciary duty to Joseph, but rather from the agreement between the parties to jointly purchase and develop the property.
Having determined that the trial court erred in so ruling, the Superior Court nonetheless affirmed the trial court’s decision on an alternative basis.
According to the Superior Court, while the gist of the action doctrine bars a tort claim arising from the performance of a contract, it does not bar a fraud claim stemming from the fraudulent inducement to enter into a contract.
The Superior Court concluded that Mirizio never intended to perform the duties he agreed to. Rather, according to the Superior Court, the facts demonstrated that Mirizio “intended to purchase the property in his name, rehabilitate the property with substantial aid from” his sister-in-law “and develop it into a condominium with the intent of selling [her] one of the condominiums after she had expended significant sums on the property.” The clear purpose of this scheme, the opinion said, was “to induce [her] to share the costs and risk of development and then cut her out of her share of the profit.” The Superior Court further elaborated that “the facts indicate that Mirizio knew that after Joseph had been induced to sink substantial capital into the project, she would in essence be committed to the property and have few if any options other than to accept Mirizio’s offer to purchase the property, which she had redeveloped, as a condominium.”
Since the gist of her fraud claim is that he fraudulently induced her to enter into an agreement and the performance of his duties under the agreement was collateral to this fraudulent scheme, the Superior Court held that the fraud claim was not barred by the gist of the action doctrine.
The litigation that took place between family members in Mirizio could have easily been avoided if they had merely memorialized their joint venture agreement in writing. From the tone of the opinion, the Superior Court clearly held Mirizio more accountable for the way things turned out given that he was an attorney who focused a significant portion of his practice on real estate.
Sadly, what happened in Mirizio is not very uncommon. In my practice, I repeatedly come across similar situations between family members and friends. Most times, the parties do not wish to incur the expense of retaining an attorney to draft up the agreement. The problem is that it is far more expensive to unwind such a transaction after-the-fact.
Reprinted with permission from the October 18, 2010 edition of The Legal Intelligencer © 2010 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, firstname.lastname@example.org or visit www.almreprints.com.