Can sellers lie about a broken sewer line?

A false advertising complaint against a pair of sellers in Wisconsin who sold a house with a broken sewer line turned into a drawn-out legal match, bouncing between several courts. The matter finally landed before the state supreme court, but would the justices agree with the lower court’s interpretation of the economic loss doctrine? Read on.

When a woman bought a house in Milwaukee, Wis., she was surprised to find the sewer line traveling from the property was broken. She sued on several claims of misrepresentation, but the courts interpreted the economic loss doctrine as barring her complaint.

On July 1, the Supreme Court of Wisconsin upheld the interpretation, but three justices expressed their clear dissent from the ruling, arguing it would harm other homebuyers and the real estate market.

Plaintiff Shannon Below bought a house on the south side of Milwaukee in February 2004 from sellers Dion R. and Dana Norton. The Nortons filled out a property condition report when they placed their home on the market. The report indicated the Nortons had no knowledge of any defects with the home’s plumbing system, aside from an issue with a bathtub drain handle.

Housewarming gift: broken sewer line

The Nortons reached a purchase agreement with Below, and the deal closed. The buyer and sellers had no personal contact during the process. After moving into the house, Below discovered the sewer line traveling between the house and the street was broken.

Below sued the couple in Milwaukee County Circuit Court on May 4, 2004, claiming intentional misrepresentation, strict responsibility misrepresentation, negligent misrepresentation, and two other misrepresentation charges.
In her complaint, Below claimed the Nortons misrepresented their knowledge of sewer problems in an effort to induce Below into buying their home. She allegedly relied on this misrepresentation and the defect caused her to suffer a pecuniary loss. Below was later allowed to amend her complaint to add a breach of contract claim.

The Nortons responded on June 11, 2004 with a motion to dismiss the complaint, alleging she had failed to state a claim upon which relief could be granted, and that some of her claims were barred by the economic loss doctrine.

Court finds claims ‘not applicable’

The circuit court granted the sellers’ motion to dismiss the complaint in its entirety on Nov. 4, 2005. The court determined the economic loss doctrine barred the common law claims of intentional, negligent and strict responsibility misrepresentation. Below’s remaining claims were also dismissed, as the circuit court found they were not “applicable.”

Below appealed, and the court of appeals ruled that the economic loss doctrine did not, in fact, bar Below’s claim. It referred to a previous case, Kailin v. Armstrong, where it had ruled that the economic loss doctrine “does not apply to claims under Wis. Stat. § 100.18” and that statements made to a prospective buyer may constitute a statement made to the public for the purposes of that statute.

Statements made to Below before the offer was accepted therefore may have formed the basis of a false advertising claim, the appellate court determined. It reversed the lower court’s dismissal of the false advertising misrepresentation claim and remanded that claim to the circuit court.

Case lobbed to another court

The remainder of the lower court’s dismissal of Below’s claims was affirmed, however. Below filed a petition for review of the appellate court’s decision, which the Supreme Court of Wisconsin granted.

The main issue on appeal, the Supreme Court noted, was whether the economic loss doctrine barred common law claims for intentional misrepresentation that occur in the context of residential or non-commercial real estate transactions.

Below argued that consumers are in a “poor position” to protect themselves from fraud because unlike commercial parties, they don’t frequently buy houses or other large items. Noncommercial buyers therefore shouldn’t have the burden of allocating the risk that they will be defrauded, she asserted. She further stated that there exists several attributes of such real estate transactions that render the economic loss doctrine’s rationale inapplicable.
Conversely, the Nortons argued that the economic loss doctrine should bar common law intentional representation claims in residential real estate transactions, and that the doctrine’s rationale that buyers are adequately protected by the contractual remedies they negotiate applied with equal force to noncommercial real estate transactions. Further, the sellers claimed real estate buyers should “consider the risk of the seller committing fraud,” and also suggested that homebuyers are in the best position to insure against just such a risk.

The economic loss doctrine, the supreme court explained, seeks to protect parties’ freedom to allocate economic risk by contract, and was designed to encourage the buyer in a transaction to assume, allocate or insure against that risk.

“For the purposes of the (economic loss doctrine), we have defined an ‘economic loss’ as being ‘damages resulting from inadequate value because the product is inferior and does not work for the general purposes for which it was … sold,’” the supreme court said. “This court also has held that a recovery for an ‘economic loss’ refers to a recovery that results either from a product failing in its intended use or from a product ‘failing to live up to a contracting party’s expectations.”

As for whether the economic loss doctrine should apply to noncommercial transactions, the supreme court pointed to its decision in Van Lare v. Vogt Inc., where it did not specifically decide whether the doctrine covered all real estate transactions, but it did hold that the doctrine “can bar at least some common law misrepresentation claims in such transactions. Indeed, in Van Lare, we held that the (economic loss doctrine) ‘may not be discarded simply because a transaction involves real estate.’”

Buyer has no luck with economic loss

Yet, in another case, the court had found the doctrine barred misrepresentation claims arising in a contractual setting unless the alleged misrepresentation fell under a “narrow fraud in the inducement” exception to the doctrine. The narrow fraud in the inducement exception would only apply if the misrepresentation was extraneous to, rather than interwoven with the contract, the court explained.

In Below’s case, if the sellers had been aware of the broken sewer line, they would have been required under state statute § 709.02 to disclose that fact to the buyer.

“As a result, the broken sewer line does not meet the requirement for the (fraud in the inducement) exception of being a matter that is ‘extraneous’ to the contract’s subject matter, and the … exception does not apply in the present case,” said the supreme court.

Thus, being satisfied that the economic loss doctrine barred common law claims for intentional misrepresentation claims in real estate transactions involving residential sales, the supreme court affirmed the appellate court’s decision. The court pointed out, however, that Below was not left without remedy.

“A purchaser of a home, as well as real estate brokers and agents, can all be assured that applying the (economic loss doctrine) still leaves statutory and contractual remedies available where misrepresentation has occurred. We note that Below’s claims under Wis. Stat. § 100.18 for false advertising was remanded by the court of appeals to the circuit court on its merits. … Section 100.18 provides a remedy for more than merely ‘false advertising,’ in that it covers fraudulent representations made to even one prospective purchaser,” the state supreme court said.

Three dissenting justices fire back

Three justices were not satisfied with the majority’s decision and expressed as much in their dissent. As stated by Ann Walsh Bradley on behalf of herself and judges Shirley S. Abrahamson and Louis B. Butler Jr., the dissenting judges described what they viewed as a decision that would allow sellers to lie without legal ramifications.

“According to the majority, a person selling a home can look the buyer in the eye, lie about the condition of the home, and escape legal consequences in tort for the lie because of the economic loss doctrine,” Bradley wrote.
The dissenting justices added that while Wisconsin was already the only state in the U.S. to expand the doctrine in such a fashion, the majority took a doctrine that was initially applied for commercial transactions for products under warranty and “used it to prevent homebuyers from recovering damages in tort caused by the misrepresentations of fraudulent sellers.”

Dissenting judges: Barring recovery for fraud victims is ‘bad’

Additionally, the dissenting judges said that an amicus brief filed by the Wisconsin Board of Realtors was the proper argument. The board had argued that the economic loss doctrine shouldn’t apply to a home purchase, and expressed their concerns about the impacts such a decision could have on the real estate market, and on the state’s consumers.

“Providing homebuyers with accurate and complete information and promoting an environment of trust and honesty are essential for fair and informed real estate contracts. The residential real estate transaction is fundamental to the real estate industry and the welfare of Wisconsin consumers seeking homeownership,” the amicus brief stated.

The dissenting judges’ response: “They’re right. The application of the economic loss doctrine barring recovery to homebuyers who are victims of fraud is bad for both the real estate market and the welfare of consumers,” Bradley wrote. “It is neither compelled by the law nor supported by good public policy. Accordingly, I respectfully dissent.”

Shannon Below v. Dion R. Norton and Dana Norton.