An issue with a flooding basement didn’t reveal itself until after a new owner moved into a home in Wisconsin, so he sued the sellers for allegedly covering up the problem. The buyer’s case went all the way to the state Supreme Court after an appellate court reversed a decision on a false representation claim, but did the ruling stick? Read on.
A homebuyer in Wisconsin alleged he was assured by the sellers that their property didn’t have any structural problems, and he relied on those representations in his decision to buy the house. When the basement flooded five times in one season, though, he sued the former owners for allegedly covering up the problem. A circuit court ruled against him, but an appellate court reversed a claim he had made alleging false representation, which the sellers appealed.
The Supreme Court of Wisconsin determined on May 28 that there were genuine issues of material fact as to whether the buyer’s reliance on the seller’s representations was unreasonable, and therefore affirmed the appellate court’s ruling.
The transaction that led to the litigation began in the fall of 2002, as plaintiff Chad Novell was interested in buying a home. A friend of the Novell family put him in contact with her sister and brother-in-law, defendants Anthony and Andrea Migliaccio, who were considering selling their house.
Novell made an offer in October 2002 after looking at the property, but the Migliaccios weren’t ready to sell. He viewed the house again in June 2003 and offered $172,500, which the Migliaccios accepted.
The sellers prepared a Real Estate Condition Report (RECR), which indicated no problems with basement or foundation defects, or water or moisture problems. Both of the Migliaccios signed and dated the form.
Finding some trouble spots
Prior to closing, Novell hired a home inspector, who listed the foundation as “marginal” and noted displacement and stair step cracks along the basement walls. He also recommended that the buyer hire a foundation specialist to give further evaluation. The inspector also listed the sump pump and moisture readings in a corner of the basement as “marginal” and described water stains in the same corner.
The Migliaccios allegedly agreed to make improvements including extending exterior downspouts and extending the sump pump piping to divert water away from the foundation, as a condition of the sale to Novell.
Novell bought the house in September 2003. Sometime in early 2004, Novell discovered standing water covering about one-third of the finished basement. During the winter, the basement flooded at least five times, Novell claimed.
Novell hired a professional engineer who found the water problems appeared to originate from the northwest corner of the basement, rather than the southwest corner as the home inspector had reported. He told Novell that if the previous owners had lived in the house for five to 10 years, they would have experienced “numerous periods of water intrusion” similar to what Novell had experienced. The Migliaccios had lived in the house for nine years before they sold it.
A foundation specialist hired by Novell concluded the basement walls had been recently painted to conceal the presence of cracks, and that water had been leaking into the basement for at least the previous three years.
Novell sued the Migliaccios for breach of contract, intentional misrepresentation, strict responsibility representation and negligent misrepresentation, among others. The Migliaccios filed a motion for summary judgment in July 2005, which the court granted on all of the claims. Novell appealed.
Defendants successful on nearly all claims
The appellate court affirmed the circuit court’s judgment on five of the six claims. On Novell’s claim of misrepresentation in violation of Wisconsin statute § 100.18, the court of appeals reversed the lower court’s ruling. It determined reasonable reliance is not an element of a claim on statute § 100.18. The Migliaccios filed a petition for review.
Section § 100.18 prohibits making false representations with the intent to sell real estate.
A real estate case* Malzewski v. Rapkin,* was cited by the Migliaccios. In Malzewski, the plaintiffs made an offer to buy the Rapkins’ house. The offer included the statement that the sellers had no knowledge of conditions affecting the property other than those listed in the RECR. The RECR noted the sellers’ awareness of basement/foundation defects and that during heavy rainstorms, there could be “a little seepage in the walls/floors,” but that the sellers had regraded to correct the problem. The purchase offer included an inspection contingency, but the plaintiffs waived their inspection rights and bought the property.
Less than a year later, the Malzewskis discovered paint peeling from the basement walls, revealing pre-existing cracks. They sued, and a circuit court found in favor of the buyers. The sellers appealed, and the appellate court reversed the lower court’s judgment on the plaintiffs’ 100.18 claim, finding reasonable reliance was not an element. The appellate court also noted in that case that reasonable reliance may be considered by a jury “in determining whether the purchase in fact relied on the seller’s representation.”
“We agree with the Migliaccios that Malzewski is directly applicable to the present case,” the Supreme Court noted. “These cases are factually and procedurally very similar. … Moreover, like the court of appeals in this case, the Malzewski court affirmed summary judgment on the common law claims but reversed with respect to the § 100.18 claim because reasonable reliance is not an element.”
Shooting themselves in the foot
The two cases had their differences, however.
“Given these similarities, and the value of Malzewski as precedent, it is surprising that the Migliaccios cite it in support of their position. Regardless of the footnote mentioning reasonable reliance, the Malzewski court was explicit that reasonable reliance is not an element of a § 100.18 misrepresentation claim. Malzewski distinguishes § 100.18 claims from common law misrepresentation claims on that basis. Thus, rather than supporting the Migliaccios’ position, Malzewski confounds it,” the Supreme Court said.
The Supreme Court also determined that the legislature “did not intend to merely add yet another remedy for common law misrepresentation” when it enacted § 100.18. And, as the court had found in Malzewski, plaintiffs are not required to show reasonable reliance as an element of a § 100.18 claim, the court added.
The Migliaccios tried to push past that barrier to their claim by arguing that even if reasonable reliance isn’t an element to prove a § 100.18 claim, the reasonableness of a person’s actions when relying on representations is a defense and could be considered by a jury in determining cause. The court conceded this point, and noted that a circuit court may find that a representation did not materially induce a plaintiff’s decision to act and that plaintiff would have acted in the absence of the representation.
“Based on the language of § 100.18, the statutory purpose of protecting the public by deterring sellers from making false representations, and the cases interpreting the statute, we determine that reasonable reliance is not an element of a § 100.18 cause of action,” the Supreme Court said. “Rather, the reasonableness of a plaintiff’s reliance may be relevant in considering the third element of such a claim, that is whether a representation materially induced (caused) the plaintiff to sustain a pecuniary loss.”
No clear indication of problems
Turning to the matter of whether Novell’s reliance on the Migliaccios’ representations was unreasonable, the Supreme Court looked to the RECR that the sellers signed, indicating they weren’t aware of any defects. The home inspection report noted problems with the basement and foundation, but the court said it could not be concluded as a matter of law that the report alerted the buyer to the water problems he would later experience.
“With respect to the inspector’s recommendation that Novell consult an expert, a reasonable interpretation of the report is that the inspector recommended that Novell hire an expert to examine the foundation rather than an expert to assess flooding,” the court said.
Prior to closing, Novell had also talked to Anthony Migliaccio about the basement, and the owner told him the walls had not been pained, the bow and cracks in the walls hadn’t moved and there had been no water in the basement during the nine years the couple lived there, the Supreme Court said. The statements were allegedly made in direct response to the inspector’s concerns, and based on Migliaccio’s representations, Novell claimed, he decided it was not necessary to hire more experts to look at the property.
Furthermore, the court pointed out that Novell had required the Migliaccios to fix problems in a corner of the basement as a condition of buying their home.
“This is not a case where it is beyond any reasonable doubt that the homebuyer simply refused to take the definitive advice of a home inspector. Rather, when the evidence is viewed in the light most favorable to Novell, his reliance was not unreasonable,” the Supreme Court said.
The evidence in Novell’s case demonstrated that a reasonable jury could determine the Migliaccios’ representations caused the buyer a loss and return a verdict in his favor on the § 100.18 claim. Thus, the Supreme Court found the circuit court erred in granting summary judgment to the defendants on that claim.
The court of appeals’ decision was therefore affirmed.
Chad Novell v. Anthony Migliaccio and Andrea Migliaccio.