Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—KanSupCt: “Buyer Acknowledgement” in Residential Real Estate Seller’s Disclosure Form Did Not Bar Aggrieved Buyer’s Claims, (Apr 16, 2013)

By Peter Reap, J.D., LL.M.

A "Buyer Acknowledgement" in a residential real estate seller’s disclosure form did not destroy home buyers’ ability to pursue the seller, the seller's agent, and the agent's brokerage firm for breach of contract, fraudulent inducement, fraud by silence, negligent misrepresentation, and violations of the Kansas Consumer Protection Act (KCPA), the Kansas Supreme Court has decided (Stechschulte v. Jennings, April 12, 2013, Beier, C.).

A decision of a Kansas appellate court was affirmed in part and reversed in part. A Kansas trial court’s grant of summary judgment to all four defendants on all of the buyers’ claims was reversed and the dispute remanded.

Background. In February 2005, A. Drue Jennings listed his home for sale. Jennings' fiancée, defendant Emily Golson, of defendant PHB Realty Company, L.L.C. (PHB), was the listing agent for the home. Jennings and Golson married in April 2005.

In anticipation of the home's sale, Jennings completed and signed a Seller's Disclosure and Condition of Property Addendum form, dated February 28, 2005. Despite having had a long history of water leaks in his home and repairs as a result of those leaks, Jennings did not disclose them when he completed the form and answered "No" to questions regarding water leak problems.

Golson was in Jennings' home a couple of times a week from August 2004 to the spring of 2005, but she never noticed any evidence of water damage or leaks.

On April 5, 2005, the Stechschultes toured the home and signed a contract to purchase it. The Stechschultes had not noticed any water leakage during their visits to the home, and they signed and dated the Buyer Acknowledgment.

A few weeks after the sale closed, heavy rains fell in the Kansas City area. The Stechschultes had not yet moved into the home but, the morning after the storm, Daniel went over to the house to check on whether it had electrical power. He discovered extensive water infiltration, including a 6- to 8-foot-wide pool of water in front of a basement window. Water was running down the wall in front of the window, from a basement light switch, and down the sides of a sliding glass door in the living room with pools of water nearby. Water was leaking in one of the windows in the master bedroom, and water was dripping from a window in an upstairs bedroom.

The buyers filed suit against Jennings, his trust (collectively "Jennings"), Golson, and PHB. As to Jennings, the Stechschultes alleged fraud and negligent misrepresentation for providing false representations in the disclosure form and for failure to disclose material defects and repairs. The Stechschultes later added a breach of contract claim. As to Golson and PHB, the Stechschultes asserted claims of negligent misrepresentation and violations of the KCPA.

The Osterhaus Case

The resolution of this dispute picks up where the court left off in its recent decision Osterhaus v. Toth, 291 Kan. 759, 249 P.3d 888 (2011), the court noted. In Osterhaus, the court determined the legal effect of Paragraph 5 of the Buyer Acknowledgment at issue (the same as the one at issue in this case). That paragraph did not require a writing signed by the seller separate from the disclosure form that contained all representations upon which the buyer intended to rely. Paragraph 5 served as an integrator; its purpose was merely to protect "the seller and the broker from the buyer's argument that the seller made oral representations upon which the buyer relied," the court ruled.

Since the court held in Osterhaus that Paragraph 5 did not relieve a seller of the obligation to make accurate and complete disclosures, it did not bar the claims asserted by home buyer in that case for breach of contract claim, reliance-based claims for fraud, negligent misrepresentation, and violation of the KCPA. Osterhaus also held that a real estate agent may be liable for negligent misrepresentation because of failure to disclose adverse property information known to the agent.

Analysis

Application of Osterhaus in this case. On appeal, Jennings argued that application of the Osterhaus rules to this matter was impermissible because it would cause him substantial hardship.

The general rule is that new opinions of the Kansas Supreme Court are binding on all other future cases and all cases still pending on appeal when the new opinions are filed. An exception may be made when (1) the new opinion establishes a new rule of law; (2) retroactive application would not further the principle on which the new opinion is based; and (3) retroactive application would cause substantial hardship or injustice.

Jennings asserted substantial hardship for two reasons: (1) The Osterhaus decision set up a new rule of property law, on which changes are usually given only prospective application, not retroactive application, and (2) he has relied to his detriment on the now-rejected reasoning and outcomes of the Katzenmeier, Brennan, and McLellan decisions from the Court of Appeals. See Katzenmeier, 39 Kan. App. 2d at 262-68; Brennan, 37 Kan. App. 2d at 387-88; McLellan, 36 Kan. App. 2d at 9-17.

Neither of these arguments was meritorious, the supreme court decided. First, Osterhaus involved contract interpretation, common-law torts, and violation of the KCPA.

Second, the earliest of the three Court of Appeals opinions Jennings attempted to invoke was McLellan, decided in 2006. This was the year after Jennings sold his home to the Stechschultes. Although it could be true that Jennings based certain of his arguments in this litigation on McLellan and its younger siblings from the court of appeals, it was impossible that Jennings based his conduct giving rise to this litigation on those cases.

Claims Against Jennings

Fraudulent inducement. The Stechschultes advanced ample evidence to support an inference that Jennings intentionally or recklessly made false representations of existing and material facts upon which the Stechschultes relied to their detriment. Specifically, in Sections 7 and 14 regarding water leakage, staining, and other material matters, despite his knowledge of the home's history and resulting current condition, Jennings answered "No" when asked if there was any "water leakage or dampness in the house, crawl space[,] or basement" and "No" regarding repairs or attempts to control water leakage or dampness. He represented that he was unaware of any staining to the carpet, flooring, or sub-flooring, despite evidence that he was aware.

Under Osterhaus, Jennings' arguments that Paragraph 5 of the Buyer Acknowledgment operated as a waiver of any reasonable reliance by the Stechschultes on his representations was without merit. Osterhaus also foreclosed Jennings' argument that, as a matter of law, the Stechschultes could not rely on the seller's disclosure form because they failed to conduct a reasonable inspection of the windows in the home.

Fraud by silence. The Stechschultes advanced sufficient evidence to demonstrate the existence of genuine issues of material fact for trial on this claim, the court held. Jennings contacted his home builder more than once about water leaks, and a repair company made eight visits to the home between 2002 and 2004 to inspect leaks and repair windows.

None of this information appeared in the seller's disclosure form Jennings signed, and the issue of whether the Stechschultes should have discovered this information through a reasonable inspection was a question of fact, not law. As with the fraudulent inducement claim, the Stechschultes' reliance to their detriment was legally cognizable under Paragraph 5 of the Buyer Acknowledgement and was supported by evidence sufficient to avoid judgment against them as a matter of law.

Negligent misrepresentation. Having ruled that the Stechschultes could continue to pursue their higher-culpability claims of fraudulent inducement and fraud by silence against Jennings, they could continue to pursue their negligent misrepresentation claim, according to the court.

Paragraph 5 was not a shield for the defense under Osterhaus, and there was sufficient circumstantial evidence in the record of Jennings' lack of reasonable care in communicating the information called for in the seller's disclosure form. There could be little doubt that the form's contents were intended to influence buyers such as the Stechschultes, and their actual reliance to their detriment was demonstrated sufficiently to avoid summary judgment.

Breach of contract. The elements of a breach of contract claim are: (1) the existence of a contract between the parties; (2) sufficient consideration to support the contract; (3) the plaintiff's performance or willingness to perform in compliance with the contract; (4) the defendant's breach of the contract; and (5) damages to the plaintiff caused by the breach.

None of the first four elements of a contract claim was at issue in this appeal. The fifth element—whether the Stechschultes suffered any damages caused by Jennings' breach—was the only element related to reliance. In short, if Paragraph 5 of the Buyer Acknowledgement relieved a seller of any responsibility to be truthful and complete in his or her disclosures because the buyer cannot rely on those disclosures as a matter of law, then any failure to fully disclose caused nothing. The court rejected this interpretation of Paragraph 5 in Osterhaus, it noted.

Because the Stechschultes did not, as a matter of law, waive their right to rely on Jennings' representations in the seller's disclosure form, they may pursue a claim that their damages were caused by Jennings' failure to provide accurate and complete disclosures, the court ruled.

Claims against Golson and PHB

Negligent misrepresentation. Evidence in the record supported Golson's actual knowledge of material defects in Jennings' home, the court observed. Jennings testified that he told Golson about the home's past water problems and what had been done to alleviate them.

Golson and PHB argued that they could not be liable for negligently supplying false information because Golson made no affirmative representations to the Stechschultes. This argument failed, the court held. Golson may not have spoken, but she communicated by transmitting Jennings' disclosure form, some of whose content conflicted with or failed to disclose information actually in her possession. Jennings testified that he reviewed the form with Golson, as well as giving her information about leaks, repairs, and stains not mentioned in it. Golson was not free to ignore what was right before her or to remain silent.

Like Jennings, Golson and PHB sought shelter under Paragraph 5 of the Buyer Acknowledgement. Osterhaus rejected this blanket waiver-of-reliance argument as to all of the defendants in that case, which included the agent and his brokerage. The supreme court did likewise here.

Violation of the KCPA. The KCPA provides that an "aggrieved consumer" may maintain a private right of action against a supplier if: (1) the supplier willfully failed to state a material fact; or (2) the supplier willfully failed to state, concealed, suppressed, or omitted a material fact.

Neither the district judge nor the Court of Appeals panel viewed the evidence in the record as adequate to repel a motion for summary judgment on the Stechschultes' claims that Golson and PHB engaged in willful conduct under the KCPA. "This perplexes us," the court commented.

Plenty of circumstantial evidence in the record supported an inference that Golson and thus PHB willfully omitted material facts. Both Jennings and Golson testified that she knew about the home's problems with water infiltration, its repairs, and staining; yet she disclosed nothing. Thus, the Stechschultes could "continue their pursuit of their KCPA claims and attempt to prove that there are flames of willfulness behind the wisps of motive."

The case is No. 100,648.

Attorneys: Dana P. Niceswanger (McDowell, Rice, Smith & Buchanan, PC) for Daniel J. Stechschulte, Jr. Heber O. Gonzalez (Polsinelli Shughart, PC) for A. Drue Jennings. Alan E. Streit (Larson & Blumreich, Chartered) for Emily A. Jennings and PHB Realty Company, LLC.

Companies: PHB Realty Company, LLC.

Cases: ConsumerProtection StateUnfairTradePractices KansasNews