Saturday, June 20, 2015

Material Dispute?

PH West Dover Property, LLC v. Lalancette Engineers, 2015 VT 48

By Andrew Delaney

When does a real-estate agent need to disclose potentially harmful-to-a-sale information about a property? Let’s find out.

There was this inn in West Dover for sale. When the real-estate agent picked up the listing, she contacted someone who’d been looking to purchase it in the past. They had some discussions and prior-prospective purchaser claimed she told real-estate agent that she’d seen flooding and had learned that the roof was in need of serious repair and might collapse.

Real-estate agent then asked seller to get an estimate for roof repairs—and seller being a carpenter who’d done most of the work on the place anyway—said the roof was fine as far as he knew, but gave real-estate agent a list of materials that’d be needed to fix the roof, or replace a huge section, or something like that.

In the meantime, real-estate agent showed the inn to plaintiffs. She didn’t mention the conversation with the prior-prospective purchaser, the seller’s “estimate,” or any potential roof problems.

Plaintiffs formed a company and entered an agreement to purchase the inn. The seller’s disclosure essentially said there were no known roof problems or issues with flooding and the like. There was an inspection contingency and plaintiffs hired the first-named defendant to do the inspection. We’re not worried ‘bout that particular dispute though, ‘cause it’s not part of this appeal. This is just between plaintiffs and real-estate agent. Anywho, the inspection report said the roof need to be fixed in spots, the upper portion needed to be observed, and that the active leaks needed to be taken care of right away.

The deal closed and a few months later, due to a number of issues, plaintiffs sued the real-estate-listing agent, among others, for negligence and consumer fraud. The trial court granted summary judgment for defendant on both claims. Specifically to consumer fraud—which is the only claim on appeal—the trial court found that “the statements from the prior-prospective purchaser were ‘simply too vague and foundationless to give rise to knowledge of specific material facts that [defendant] would have a duty to disclose’ under the Consumer Fraud Act.” The trial court further reasoned that the failure to disclose the roof-repair estimate wasn’t a material omission ‘cause the plaintiffs (from the inspection report) already knew the roof needed repairs. The trial court ruled that the estimate couldn’t be considered material as a matter of law and granted summary judgment to real-estate agent.

I’m running out of ways to creatively phrase the SCOV’s standard of review of a grant of summary judgment, so we’re going to do a little copyin’ and pastin’. The SCOV reviews the ruling de novo, taking the evidence in the light most favorable to the non-prevailing party. “Summary judgment is appropriate only when ‘the record clearly shows that there is no genuine issue of material fact and that the movant is entitled to judgment as a matter of law.’”

The SCOV first notes that real-estate brokers and agents ain’t structural engineers or contractors, so their duties to disclose exist only so far as they know a seller’s representations to be false. I guess ignorance is bliss, after all. Basically, the SCOV majority says real-estate professionals don’t have to investigate the seller’s representations unless they know those representations to be false.

To establish a claim in this context, plaintiffs have to show: (1) a deceptive representation, omission, or practice; (2) that they interpreted the message reasonably under the circumstances; and (3) that the omission was material in that it was likely to affect their conduct or decision. Whether an omission or misrepresentation is measured by the proverbial “reasonable person” standard—meaning that a reasonable person would regard the information as important in making a decision.

The SCOV looks at the prior-prospective purchaser’s statements. While the SCOV majority notes that there’s a difference between statements of fact and opinion, and that the statements here don’t fit easily into either category, it concludes that the statements “were not sufficiently specific to impute knowledge of defects in the property to defendant, nor to require disclosure of material information that might affect a reasonable consumer’s conduct or decision.” The SCOV reasons that the statements are based on second-hand info, and therefore lack sufficient support or foundation to require disclosure. Was the roof really in danger of collapsing?

As the majority puts it: “To require the realtor to relate every nonspecific and unattributed rumor to subsequent buyers would be unreasonable. The mischief of such a requirement is obvious from this case.” The majority reasons that there’s nothing in the record indicating that “prior-prospective purchaser was qualified to offer a reliable assessment of the roof.”

The SCOV applies the same general reasoning to the ‘flooding in the parking lot” statements. In the majority’s view “flooding” is too vague and unspecific to give rise to a duty to disclose to other consumers. The majority reasons that “flooding” could mean anything from puddles to a lake. As you’ll see below, the dissent isn’t too impressed with that line of reasoning.

On the written roof-repair estimate, the majority takes a slightly different tack, reasoning that this is the kind of information—combined with seller’s representation of “no known problems” with the roof—that could give rise to a duty to disclose. In this case, however, with the inspection report, plaintiffs were on notice of problems with the roof before purchase. While the majority does not agree with the trial court that the estimate was immaterial as a matter of law, it affirms on the independent-knowledge basis. The reasoning is that armed with independent knowledge, the purchaser is not actually misled by the omission, and therefore can’t be harmed by it. The misrepresentation has to cause the injury for plaintiffs to prevail.

And so, the majority holds that “a buyer may not recover under Vermont’s consumer protection statute for omission of information by the seller or his agent when, as in the circumstances of this case, the buyer has independent knowledge of the same information prior to the completion of the sale.” 

And the duty to disclose on the real-estate agent's part seems to be the proverbial "See no evil; hear no evil; speak no evil." 

Justice Dooley, joined by Justice Robinson, dissents. The dissent reasons: “One of the most important requirements for a case to be decided on summary judgment is that no material issue of fact exists after we draw all inferences from the information in the record in favor of the nonmoving party.” The dissent reasons that if this requirement were honored in this case, it’d be reversed and ultimately up to “a jury to determine whether defendant’s statements or omissions were misleading and caused plaintiffs to sustain damages.”

The dissent agrees with the majority’s articulation of the applicable substantive law. In the dissent’s view, however, the facts proffered by the plaintiffs would allow a jury to find that defendant real-estate agent misled plaintiffs or omitted material information and that had an effect on plaintiffs’ decision whether or not to purchase and what price they would pay.

The dissent explores the prior-prospective purchaser’s affidavit in detail, noting that, among other things, prior-prospective purchaser personally observed both mold and flooding. The dissent notes, “It is important to understand that these statements were made by an apparently disinterested person who was investigating whether to make a $1.2 million real estate purchase but who ultimately decided not to because of deficiencies in the building and surrounding property.”

The dissent takes issue with the majority’s “not sufficiently specific” reasoning. The majority in fact seems to make inferences in favor of the moving party. “If we fairly apply the requirement that we draw all inferences from the information in the record in favor of the nonmoving party, the majority’s reasons are inadequate.” The dissent emphasizes that the majority got it wrong with the could-be-seen-as-opinion type of reasoning. The prior-prospective purchaser’s statements were, in fact, statements of fact: “I witnessed flooding and mold in the basement” and “I witnessed flooding in the parking lot.” The dissent can’t classify these statements as not sufficiently specific or too vague. They’re certainly not “second-had reports” or “rumors.”

“But the most significant deficiency in the majority’s reasoning is its failure to apply the requirement that inferences from the facts in the record be drawn in favor of plaintiffs, as the nonmoving party, and not defendant.” This brings us to the “flooding”-could-be-puddles-formed-after-rain reasoning in the majority opinion. If I were writing the dissent I might’ve phrased it something like, “In Vermont, we are intimately familiar with the fragrance of fresh bovine excrement and the majority’s reasoning reeks of it.” This is why I’ll never be a SCOV justice. Justice Dooley phrases it much more politely, but the sentiment is similar.

No matter which way you slice it, the dissent reasons, the majority is “failing to honor the requirement that we draw inferences in favor of the nonmoving party.” The inferences that can be made here “are that the flooding in the basement and parking area and the mold in the basement were such serious deficiencies in the property that they caused a prospective purchaser not to purchase the property, and that if plaintiffs had known of statements regarding such deficiencies, they may not have purchased the property or may have negotiated a lower price.” This isn’t a resolve-it-on-summary-judgment proposition. When the evidence available is subject to conflicting interpretations, it goes to the jury. That’s how this game is played.

Whether the roof-might-collapse statement should’ve been disclosed is a closer question for the dissent, but there’s still enough to avoid summary judgment. The dissent notes that the roof-might-collapse statement stemmed from one of prior-prospective purchaser’s visits to the inn, so it’s reasonable to infer that it was based on personal observation. The majority’s vague-and-unreliable reasoning is contradicted by the fact that plaintiffs had new inspections that uncovered serious structural problems with the roof just months after the purchase. Again, “a reasonable jury could have concluded that defendant withheld from plaintiffs information regarding the condition of the roof that she knew to be contrary to what the seller was claiming in his disclosure statement—that he did not know of any current problems with the roof.”

Regarding the disclosure of the written roof-repair estimate, the dissent takes issue with the majority’s premise: that the plaintiffs had the same information that would’ve been disclosed. The dissent makes clear it was not the same information.

The dissent compares the inspection report with the seller’s roof-repair estimate. Where the inspection report said there were some missing and broken shingles and some leaks needed to be repaired but that the roof was generally in good condition, the seller’s estimate contemplated replacing almost the entire roof. While the estimate can be interpreted as just providing the cost of materials for replacing the whole roof—a hypothetical in other words—it can also be interpreted as contemplating actually replacing the whole roof. It was after all made by the seller, who had intimate knowledge of the property and had completed most of the repairs on it. In the summary-judgment context, however, inferences must be made in favor of the nonmoving party.

The dissent would reverse on the three issues mentioned.

Why do I agree with the dissent here? It’s simple really. Both the majority and dissent provide perfectly plausible interpretations of the available evidence. But the standard of review for summary judgment requires that there be no genuine dispute of material fact before judgment as a matter of law is considered. Here, without making inferences in favor of the moving party, material facts are in dispute. The 3-2 opinion—with its competing interpretations of the available evidence—illustrates that. I’d propose a rule that any time a summary-judgment decision is upheld, it must be by unanimous decision.


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