Inspector sued in home "staging" case.

A couple experienced in real estate transactions alleged they were deceived into buying a residence that was riddled with defects. The inspection report indicated problems with the flooring and portions of the roof. Would the court believe the buyers’ claims that they reasonably relied on others involved in the transaction? Read on.

Two real estate agents who bought a house in Massachusetts were upset to find rotting floors and signs of rodents living in the walls. They sued the sellers, agents and the home inspector involved in the transaction. The Superior Court of Massachusetts, Essex County, on April 4 denied the defendants’ motions for summary judgment on all but one claim.

Ira Grossman and Gail Wilson, both real estate agents and developers, were interested in buying a home in Marblehead, Mass. in September 2005 from defendants Frederick and Patricia Pouy. The Grossmans signed a seller’s statement of property condition on Sept. 6, 2005, which noted the information provided was not guaranteed by the broker or agent, and that the disclosure statement wasn’t a representation or guaranty as to the condition of the property by either the buyer or the seller.

Report hints at need for repairs

Defendant Michael Drouin with ABC Home Inspection Inc. inspected the property on Sept. 9, 2005, and noted defective roof shingles and portions of the roof that were listed as fair/unsatisfactory. The flooring condition was also listed as fair/unsatisfactory.

The Grossmans executed a purchase and sale agreement with the Pouys on Sept. 17, 2005 to buy the property for $825,000. The agreement included a statement noting that the buyer was given the opportunity to inspect the property and that execution of the agreement was an acknowledgement that the buyer was satisfied with the property’s condition.

After they bought the house, the Grossmans allegedly uncovered numerous problems with the property. They removed carpeting and flooring and discovered prior repairs and soft spots. The defective areas had allegedly been covered with furniture, planters and carpeting. The flooring under the refrigerator was rotted, and the adjacent walls contained mold.

The new owners also allegedly detected a smell which apparently was caused by rodents living under the rotted kitchen floor and in a foyer wall. The house’s roof, which had missing shingles and had areas requiring patching, had to be completely replaced.

Upon their discovery, the Grossmans sued the Pouys, Drouin, ABC Home Inspection, real estate agent Susan Noble and her former employer, Carlson GMAC Realty, on claims of fraud, negligent misrepresentation, promissory estoppel and unfair or deceptive acts or practices in the conduct of trade or commerce.

The Pouys contended that there was no evidence they made any misrepresentations regarding the home’s alleged defects. Yet a roofer hired by the couple told the Pouys “multiple times over the course of several years” that the roof needed to be replaced, the court noted. Additionally, a construction company employee who the Grossmans hired to work on the house testified that the stains found on the carpet were the same shape as planters that covered them, and that furniture was located on top of damaged areas.

Staging to cover defects?

The Grossmans claimed Noble hired a staging company to arrange furniture, or that she had rearranged the furniture herself. Noble argued that there was no evidence that she had supplied the buyers with specific false information regarding the alleged defects, and that she never made false statements or suggested that she rearranged the furniture.

The court stated that Noble did not get information about the house second-hand through the Pouys, but rather, she had been in the house herself and “presumably would have seen the alleged damage.” Thus, there was enough evidence to raise a material issue of fact regarding whether Noble misrepresented the home’s condition so that she could sell it.

Looking to the Grossmans’ fraud claim, however, the court determined there was conflicting evidence as to whether the buyers’ reliance was reasonable. The Grossmans were given an inspection report which identified problems in the house needing repair, or areas that were deemed unsatisfactory, and should have known what this meant, the court said.

“The Grossmans are familiar with and have been involved in many real estate transactions in the past,” the court said. “This knowledge makes reliance on the seller’s statement and (purchase and sale) agreement potentially unreasonable.”

The Pouys could not dodge potential liability on a fraud claim through the purchase and sale agreement. The agreement contained several provisions, or “so-called merger or exculpatory causes,” but language in purchase and sale agreements that seeks to shelter the seller from liability aren’t automatic defenses to fraud allegations, the court said, citing the case of Billingham v. Dornemann.

Noble and Carlson GMAC Realty tried to avoid the fraud charge, citing the outcome of Sound Techniques Inc. v. Hoffman, but this case was misapplied, the court found. That case involved a commercial agreement, unlike the transaction with the Grossmans.

“Nothing serves to render the merger clauses completely ineffective,” the court said. “There are genuine issues of material fact as to the nature of the representations made by the parties. A determination that the Pouys committed fraud may render them liable, because the merger clauses would be unenforceable. Summary judgment is not appropriate on counts I and IV (fraud).”

Merger clause may apply

Next, addressing the negligent misrepresentation claims, the court did point out that the language in the Sound Techniques case suggested there could be circumstances where a merger clause wouldn’t automatically bar a claim for negligent misrepresentation. One of these circumstances, the court said, may occur if the “underlying spirit” of the transaction is residential instead of commercial.

As for the Grossmans’ case, there were genuine issues of material fact regarding whether the exact nature of their transaction with the Pouys was commercial or residential. That question should be posed for a jury to determine, the court said, and thus denied the Grossmans’ motion for summary judgment for the negligent misrepresentation claim.

Noble and Carlson GMAC Realty next argued the promissory estoppel claim should fail because there was no contract between the Grossmans and the real estate agent or the realty firm. They misinterpreted the law, however, because promissory estoppel is used by the courts when no express contract exists, the court said. Also, whether the Grossmans reasonably relied on statements or representations made by Noble or the Pouys was a question of fact that was determined by the court to be “inappropriate for decision” at the summary judgment phase. It thereby denied summary judgment on that claim.

The Grossmans had also alleged the defendants violated General Law c. 93a, § 2(a), which makes unlawful unfair or deceptive acts or practices in the conduct of any trade or commerce. “Mere negligence is not a violation,” of the statute, the court said, but a deceptive act which results from a defendant’s negligence is.

Generally, the statute is premised on a willful misstatement of fact. A negligent misrepresentation of fact could constitute an unfair or deceptive act as well, the court said, “if the truth could have been reasonably ascertained.”

Agent could be held to deceptive act claim

“The sellers, the Pouys, can only be liable if they, or one of them, were acting in a business or commercial context. … There is no exposure under c. 93A for the individual homeowner who sells his defective home utilizing the services of a real estate broker,” said the court. “A real estate broker, however, or one actively involved in the real estate transaction, can be subject to liability under c. 93A.”

Noble, therefore, could potentially be liable under the statute, and she was denied summary judgment on that claim.

The Pouys could be held liable if it was found they acted in a commercial or business context, since the statute applies only to the regulation of business practices. The Grossmans bought the Pouys house for a personal residence, and there was no proof that they intended to operate a business there, the court determined. The Pouys were granted summary judgment on that claim alone.

All of the motions for summary judgment, therefore, were denied with the exception of the unfair trade practices claim against the Pouys.

Ira Grossman and Gail Wilson v. Frederick R. Pouy, Patricia C. Pouy, Susan Noble, Carlson GMAC Realty, Michael Drouin and ABC Home Inspection Inc.

Whew. I am worn out after reading that. Everything is getting more and more legal. We all need to be observant, careful, and when in doubt, write it up.

And don’t move to Massachusetts!

Claims of fraud and negligent misrepresentation usually ask the court to award punitive damages, which, if successful, can run into the millions of dollars, which is why one needs to carry E&O insurance.

I have yet to read a lawsuit involving a home inspector that did not include various such terms and request for punitive damages. Never have I read a lawsuit involving a home inspector as defendant that involved simple breach of contract, so the various limitation of liability clauses, inspection refund clauses, etc., won’t work, not when there is the possibility of punitive damages involved. Without E&O insurance, one can be spending many hundreds of thousands of dollars to defend oneself. With E&O, it’s a mere $1,000-$5,000 deductible.

And carry E&O insurance. See my preceding post.