SILENT FRAUD AND THE DUTY TO DISCLOSE. A REALTOR s duty to disclose defects in property has not been the subject of a legal

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1 SILENTFRAUDANDTHEDUTYTODISCLOSE I. INTRODUCTION AREALTOR sdutytodisclosedefectsinpropertyhasnotbeenthesubjectofalegal updateforseveralyears.thisisprobablyduetothefactthatinmichigan,ithasgenerallybeen foundthatwhenrepresentingsellers,realtors havenodutytodisclosedefectstobuyers. Inanalyzingthisquestion,Michigancourtshaverecognizedthatthereisa commercially antagonisticrelationship betweenthebuyerandtherealtor representingtheseller. Further, the number of questions in the seller s disclosure form has greatly reduced the opportunityforasellertoremainsilentastoapotentialdefect.however,asdemonstratedby severalrecentcourtofappealsdecisionsdiscussedbelow,therearestillcircumstancesin whichasellerandhisagentcanbefoundliableforsayingnothing,i.e., silentfraud. II. DISCUSSION Plaintiffs buyers,whohavediscovereddefectsinthehousetheyhavepurchased, typicallyclaimoneormoreofthefollowing: (1) thatthesellerand/orhisagentmadefalsestatementsthattheyknew werefalse; (2) thatthesellerand/orhisagentmadefalsestatementsthattheydidnot know were false, but for which they nonetheless should be held responsible;and/or (3) thatthesellerand/orhisagentintentionallywithheldinformationthat theyhadanobligationtodisclose. Therecentcasesthatwewilldiscussfocusonthethirdtypeofclaim i.e.,aclaimof 2010 by the Michigan Association of REALTORS 51

2 silentfraud.however,inordertobetterunderstandthese silentfraud cases,wewillfirst provideabriefrefresherontheothertwotypesofclaims. a. FRAUD INTENTIONALMISREPRESENTATION Allpersons sellers,buyersandrealtors alike areliableiftheycommitfraud,i.e., forfalsestatementswhichtheyknowtobefalseatthetimetheymakethem.asrealtors mayrecall,ithasalwaysbeentherulethatinordertoprovefraud,aplaintiffmustproveallof thefollowingsix(6)elementsbyclear,satisfactoryandconvincingevidence: (1) thatdefendantmadeamaterialmisrepresentation; (2) therepresentationwasfalse; (3) whenmade,thedefendantknewtherepresentationwasfalseormadeit recklessly, without any knowledge of its truth and as a positive assertion; (4) thedefendantmadetherepresentationwiththeintentionthatitshould beacteduponbyplaintiff; (5) the plaintiff acted in justifiable and reasonable reliance upon the representation;and (6) theplaintiffsufferedinjuryinrelianceupontherepresentation. Unfortunately,overtheyearsthecourts analysesofthesedifferentelements,andthe weight afforded to each, has not been consistent. Many decisions have focused on the justifiableandreasonablereliance element.inmanyofthesecases,thecourtneverneeded to decide whether someone actually made the false statement or whether he knew the statementwasfalsewhenhesaidit.rather,thecourtdecidedthatevenassumingthefalse 2010 by the Michigan Association of REALTORS 52

3 statementwasmade,thebuyerdidnotrely,orshouldnothaverelied,uponthatstatement.in essence,thecourtimposedresponsibilityonthebuyertotakenoteoffactsthatwerereadily apparent. InMinervTeasel,1forexample,thebuyersallegedthataftertheytookpossessionofthe house, they discovered that the property suffered from many defects, problems and code violationsthatwouldcostmorethan$74,000tofix.thebuyerssuedthesellersandthe sellers realestateagentonanumberoftheories,includingfraudulentmisrepresentation.the defendantsrespondedthatthebuyershadpurchasedthehouse asis andthatthebuyershad thehomeinspectedpriortoclosing.thetrialcourtdismissedthebuyers fraudclaimagainst alldefendantsandonappeal,thecourtofappealsaffirmedthetrialcourt sdecision. TheCourtinMinerfirstnotedthatan asis clausedoesnotprotectsellersiftheymake fraudulentmisrepresentationstothebuyersbeforethepurchaseagreementissigned.the Courtwentontostate,however,thatinorderforthebuyerstorecover,theymustshowthat theyactuallyreliedonthesellers misrepresentations.thecourtconcludedthathere,the buyers fraudclaimagainstthesellerswascorrectlydismissedbecausethebuyershadsought an independentassessment ofthepropertybeforetheywaivedtheirrighttorescindthe purchaseagreementpursuanttotheinspectioncontingency.thecourtconcludedthatthe buyers had relied on this independent assessment rather than the sellers alleged misrepresentationsindecidingwhethertopurchasetheproperty WL ,MichApp,April10,1998(DocketNos and199165) by the Michigan Association of REALTORS 53

4 b. NEGLIGENT/INNOCENTMISREPRESENTATION Often, a plaintiff buyer can establish that the seller and/or the agent made a false statement,butcannotprovethatthepersonknewthatthestatementwasfalseatthetimeit was made. These plaintiffs must proceed under a claim of negligent or innocent misrepresentation.aninnocentmisrepresentationclaimislikeafraudclaimexcept: (1) The plaintiff does not need to prove that the other party intended to deceivetheplaintifforeventhatheknewthatthestatementwasfalse; and (2) The plaintiff does have to prove that the parties were in privity of contractandthattheinjurysufferedbytheplaintiffinuredtothebenefit ofthepartymakingtherepresentation.2 Michigancourtshaveconsistentlyheldthataseller sbrokermaynotbeliabletoabuyer fornegligentorinnocentmisrepresentationbecauseoneoftheelementsforsuchacauseof action privityofcontract islacking.3aseller,ontheotherhand,doeshaveprivityof contract with the buyer and can be liable for even an innocent misrepresentation if the misrepresentationwasmaterialandthebuyerwasjustifiedinrelyingonthatrepresentation. However,becauseofspecificlanguageintheSellerDisclosureAct( SDA ),ithasbeenheldthataseller cannotbeliableforaninnocentmisrepresentationcontainedinaseller sdisclosurestatement.4 2M&D,IncvMcConkey,231MichApp22(1999). 3BeckvHillock,unpublishedopinionpercuriamoftheMichiganCourtofAppeals,decided July20,1989(DocketNo );HastingsvKniat,unpublishedopinionpercuriamofthe MichiganCourtofAppeals,decidedJanuary20,1989(DocketNo );McMullenv Joldersma,174MichApp207;435NW2d428(1988);MinchellavFredericks,138MichApp 462;360NW2d896(1984). 4RobertsvSaffell,2008WL (MichApp);BergenvBaker,264MichApp by the Michigan Association of REALTORS 54

5 c. NON DISCLOSURE SILENTFRAUD i. Background The failure to divulge a material fact, which a party in good faith is duty bound to disclose, may give rise to a claim for fraudulent concealment. This theory of liability is generallyreferredtoas silentfraud. TheCourtofAppealshasoftenstated,however,that meresilencealoneisnotsufficienttoconstitutesilentfraud.rather,apersonmusthavea dutytodisclosetheinformation,suchasinresponsetoaspecificconcernexpressedbythe buyer. TheMichiganCourtofAppealshasheldthataseller sbrokerisnotliabletoabuyerfor non disclosurealone.5michigancourtshavesimplynotimposedageneraldutyontheseller s agenttodiscloseknowndefectstoabuyer.thecourtshavesimplyrecognizedthatthelisting brokerrepresentsthesellerand,therefore,owesnofiduciarydutiestoabuyer.theonlytime a seller s agent may owe a duty to volunteer information to a buyer is to correct a misimpressionormisinterpretationthathecausedpreviouslyorinresponsetoaspecific concernexpressedbyabuyer. Astosellers,Michigancourtshaveheldthatinorderforabuyertohaveaclaimagainst a seller for silent fraud, the buyer must show that the seller actually made some type of misrepresentation.inthemcconkeycase,thecourtofappealsmadeclearthatthis (2004). 5McMullenvJoldersma,174MichApp207;435NW2d428(1988) by the Michigan Association of REALTORS 55

6 representation does not necessarily mean that the seller made a false statement. A misrepresentationneednotnecessarilybewordsalone,butcanbeshownwheretheparty,if duty boundtodisclose,intentionallysuppressesmaterialfactstocreateafalseimpressionto theotherparty. ii. RecentCaseLaw Inonerecentcase,ElliotvTherrien,6theTherrienshadtheirMichiganhomelistedfor sale.themichiganhomewasvacantasthetherrienswerelivinginflorida.anofferwas madeandacceptedontheproperty.ahomeinspectionwasmadeunderthetermsoftheoffer anditrevealedextensivemoldinthehome sattic.thissalewasterminated. Mr.Therrienaskedhisbrother,JimTherrien,wholivedinMichigan,toinvestigatethe moldproblem.jimtherrienhiredamoldconsultantwhoinspectedthepropertyandtestedit formold.themoldconsultantthenprepareda MoldFreeReport ( MFR ),whichwassentto thetherriensandtheirlistingagent.themoldconsultanthadcheckedandtestedformoldin thehome satticandmasterbedroom. TheMFRdisclosedthepresenceofmoldintheatticandmasterbedroom.TheMFR providedthatairtestsinthemasterbedroomindicateda highlevelofcontamination. The sporecountsintheatticandmasterbedroomwerelistedas high, includingsporesfromthe penicillium aspergillusgroup.themfrstatedthataspergillusandpenicillium canproduce potentmycotoxins which arefungalmetabolitesthathavebeenidentifiedastoxicagents 2010 by the Michigan Association of REALTORS 56

7 andthat evenlowlevelsofthesespeciesshouldberemediated. TheMFRwentontonotethe existenceofotherformsofmoldintheatticanddescribedthevarioushealtheffectsthatoccur whenapersonisexposedtomoldorinhalesspores.theseadversehealtheffectscaninclude: allergic reactions, infections, toxic effects, runny nose, eye irritation, cough, congestion, asthmaaggravation,headache,andfatigue. TheMFRcontainedextensiverecommendationsregardingremediationofthemold situation in the home, including clearance testing after the work was performed to make certainoccupancywassafe.theconsultantgaveanestimateofalmost$9,000totakecareof remediationwork.thecourtofappealsfoundthatthemfr sremediationrecommendations madeitquiteclearthattherewasaneedforprofessionalservicesandqualifiedpersonnelto dothework. TheTherrienschosenottouseprofessionalsfortheremediationwork.Instead,the Therrienshiredacontractortoremovetheattic sinsulationandtheroof.then,brotherjim, whohadnotrainingorexperienceinconstruction,moldtestingorremediation,scrubbedthe trusses using bleach or Lysol and then added new attic insulation. The contractor then returnedandputonanewroof.noclearancetestingwasperformedasrecommendedinthe MFR. Thefirstseller sdisclosurestatementpreparedbythetherrienshadnotmentioned mold.asecondseller sdisclosurestatementwasthenprepared,whichspokeonlyofthe 62010WL293071,MichApp,January26,2010(DocketNo ) by the Michigan Association of REALTORS 57

8 discoveryofmold on thehome sroof.therewasnothingexpresslystatedinthedisclosure statementregardingmoldintheatticorinthemasterbedroom.thestatementdiddisclose thattheroofandinsulationhadbeenreplaced. When the home was put back on the market, the Elliotts made an offer that was accepted.theelliottswerenevergiventhemfr.theinspectionconductedbytheelliotts inspectordidnotrevealanymoldproblems. Priortoclosing,theElliottsapparentlyhadcontinuingconcernsabouttheconditionof theproperty,includingelectricalandplumbingissues.theelliottswerealsoconcernedabout mold.adaybeforetheclosing,a powwow washeldatthehousebetweenthetherriens,the Elliottsandtheirrespectiveagents.Therewasevidencesubmittedattrialthat,atthismeeting, thetherrienshadbeenaskedaboutthemoldreferredtointhesecondseller sdisclosure statementandthatthetherrienshadrespondedthatthemoldhadbeen on theroofofthe house,thatithadbeennon toxicandthattheentireroofhadbeenreplaced.therewasalso testimonythatatthe powwow, theelliotts,especiallymrs.elliott,repeatedlydemandedthat thetherriensdiscloseanyandallproblemsrelatedtotheconditionofthehouse. Thedayafterthe powwow, alengthyclosingtookplace.thetherriensnowhadan attorneyrepresentingthem.attheclosing,thetherrienssignedathirdseller sdisclosure statement.thisdisclosurestatementagainindicatedthatmoldhadbeendiscovered on the roofandthattheroof,shinglesandinsulationhadbeenreplacedandthatthejoistshadbeen scrubbed by the Michigan Association of REALTORS 58

9 NotlongaftertheElliottsmovedintothehouse,theyandtheirsonbecameill.The CourtofAppealsdecisionindicatesthattheElliottswereexperiencingsuchsymptomsas runny nose, coughing, sneezing, puffy eyes, rashes, breathing and respiratory difficulties, bowelproblems,asthma,fatigue,migraines,memoryloss,seizuresandanoverallmalaise. AccordingtotheElliotts,testingbydoctors,includingbloodtests,revealedthepresenceof penicilliumandaspergillus.theelliottsweretoldbytheirfamilydoctortovacatethehouse andnottoreturnuntilafteritwastestedformoldanddeclaredsafe. Testingwasperformedonthehomeand,asexpected,itrevealedthesamehighlevelsof mold as indicated in the prior MFR. The second mold tester concluded that the mold contaminationwassoextensiveinthehousethattherewascross contaminationthroughout theinteriorofthehouse.thesecondmoldtesterwasgreatlyconcernedwithanyonelivingin thehousewiththecontaminationlevelsfoundinthehome.sheadvisedbillelliottthatthis wasoneofthesickesthousesshehadeverencountered. Pursuanttothesecondexpert s direction,theelliottsdiscardedalargeamountofpersonalpropertyandmovedoutofthe house. Ultimately, the Elliotts were facing the situation where the house was essentially gutted,remediationcostswereexceeding$100,000andtheywerelivinginatrailerpark.the Elliotts stopped making mortgage payments, gave up on the house and the house was foreclosed. The Elliotts sued the Therriens and the listing agent. The listing agent settled for $20,000.Ultimately,ajuryawardedtheElliottsdamagesintheamountof$441,700basedon 2010 by the Michigan Association of REALTORS 59

10 theirclaimthatthetherrienshadcommittedsilentfraud.thetherriensappealedthejury verdict. Indeterminingwhetherthejuryverdictwasappropriate,theCourtofAppealsfirst reviewedwhataplaintiffliketheelliottshastoproveinordertoestablishaclaimforsilent fraud. To establish such a claim, the Court held, a plaintiff must by clear and convincing evidenceestablishthefollowing: 1. Thedefendantfailedtodiscloseamaterialfactaboutthesubjectmatter atissue; 2. Defendanthadactualknowledge,i.e.,knewofthefacts; 3. Thefailuretodisclosethefactgavetheplaintiffafalseimpression; 4. Whenthedefendantfailedtodisclosethefact,heorsheknewthatthe failuretodisclosurewouldcreateafalseimpression; 5. Whenthedefendantfailedtodisclosethefact,heorsheintendedthat theplaintiffrelyontheresultingfalseimpression; 6. Theplaintiffindeedreliedonthefalseimpression;and 7. Theplaintiffsuffereddamagesresultingfromhisorherreliance. ItshouldbenotedthatoneofthedefensesassertedbytheTherrienswasthattheyhad disclosedtheexistenceofmoldonthedisclosureformandthuswereshieldedfromliability under the SDA for a number of reasons. The Court of Appeals rejected these arguments, referringspecificallytotheprovisioninthesdawhichstatesthattheact doesnotlimitor abridgeanyobligationfordisclosurecreatedbyanyotherprovisionoflawregardingfraud, misrepresentationordeceitintransfertransactions by the Michigan Association of REALTORS 60

11 Thus,obtainingtheseller sconsenttodualagencypriortoitoccurringisnecessary. Fortraditionalagencyfirmsthatrepresentbothsellersandbuyers,itisalsoimportant tohaveadualagencyprovisioninabuyer sagencyform.currently,themarexclusivebuyer agencyformprovides: In the event Client elects to make a bona fide offer on real propertylistedbybroker(checkasapplicable): (a) ThisAgreementshallautomaticallyterminateonlywith regardtothatrealproperty(butshallcontinueastoallotherreal property)andbrokershallcontinuetheagencyrelationshipwith the owner of the real property listed by Broker. Any fees previouslypaidtobrokerbyclientpursuanttothisagreement shall be returned to Client at closing where the agency relationshipwasterminatedpursuanttothisparagraph. (b) BrokershallactasdiscloseddualagentofbothClientand the owner of the real property listed by Broker pursuant to a writtenagreementintheformattachedheretobetweenbroker, Clientandtheowneroftherealpropertylisted.Insuchevent, BrokershallbeentitledtoanyfeesowedbyClientpursuantto thisagreement. (c) Brokershallactasatransactioncoordinatortofacilitate thetransaction,andnotasanagentforeithertheclientorthe owneroftherealpropertylistedbythebroker.insuchevent, BrokershallbeentitledtoanyfeesowedbyClientpursuantto thisagreement. Underthisagreement,thepartiescanagreethatifthebuyerbecomesinterestedinone ofthefirm slistings,eithertheagencyrelationshipwiththebuyerwillterminateorthebroker willactasdiscloseddualagent. Thelegalreasonforincludingdualagencyprovisionsinlistingagreementsandbuyer 2010 by the Michigan Association of REALTORS 68

12 AssumingthefactssetforthintheCourtofAppealsopinionaretrue,itisnotdifficultto seewhythejuryfoundinfavoroftheelliottsandwhythecourtofappealsaffirmedthat decision.thecourtofappealsnotedthattherehadbeentestimonythatwhenaskedatthe powwow, the Therriens had denied that there had been mold anywhere in the house, includingtheattic.further,hadthetherriensprovidedthemfrtotheelliotts,theelliotts wouldhavebecomeawareofthemoldintheatticandthemasterbedroomandoftheneedfor extensiveprofessionalremediationinthehome. Inthiscase,theTherriensprovidedmultipleseller sdisclosurestatementsandallegedly made oral statements which indicated that the mold had been limited to the roof and, essentially,thatithadbeenfixed.whenquestionedbytheelliotts,thetherriensknowingly failedtodisclosethesituationasdescribedinthemfrand,presumably,ofwhichtheywere awareasaresultoflivinginthehome.thisresultedinthefindingofsilentfraudagainstthem. HadthecaseproceededagainsttheTherriens agent,presumablythesameclaimswouldhave been made against her, i.e., she knew the contents of the MFR, had been present at the powwow andhadsaidnothingtocorrecttheincompleteinformationinthesecondandthird seller sdisclosurestatements. Inanotherrecentcase,7thebuyerssuedthesellersforbothactualfraudandsilent fraudafterthebuyersdiscoveredseriousstructuralproblemswiththehometheypurchased. Attrial,itwasestablishedthatthesellershadthehomeinspectedpriortotheirpurchaseof 7WestrickvJeglic,unpublishedopinionpercuriamoftheMichiganCourtofAppeals,issued 2010 by the Michigan Association of REALTORS 61

13 In the final case involving a claim of silent fraud,8 the plaintiff tenant leased a gas stationfromdefendant landlordin2006foraperiodoftenyears.aboutayearintothelease, the tenant discovered that the gas station had been found to be a site of environmental contaminationin1996 afactknowntothelandlord,butnotdisclosedtothetenant.the tenantsuedonanumberoftheories,includingsilentfraud,seekingbothrecissionofthelease andreimbursementforthe$200,000thatthetenanthadinvestedintheproperty.thetenant reliedinsignificantpartonamichiganenvironmentalstatutethatrequiresdisclosureinthe eventofatransferofaninterestincontaminatedproperty. Thelandlordarguedthatlanguageintheleaseitselfputthetenantonnoticeofthe contamination.thelandlordpointedtoseveralclausesintheleasethatprovidedthatthe tenantwouldnotbeliableforanypre existingcontaminationonthepropertyand,moreover, thatthelandlordwouldindemnifythetenantandholdthetenantharmlessfromanyliability asaresultofanypre existingcontamination.thislanguagewassufficienttoputthetenanton notice,thelandlordargued.whywouldthelandlordagreetoassumeliabilityforanypreexistingcontaminationifinfactthesitewasnotcontaminated? Thejuryfoundforthetenantandthelandlordappealed,arguingthatthetrialjudge shouldhavethrownoutthecaseonthebasisthattherewasnoreasonablereliancebythe tenant.thecourtofappealsdeterminedthatthequestionofwhethertheleasereasonably placedthetenantonnoticewasaquestionforthejuryandthatthejuryhadfoundthatitdidnot Lapeer,LLCvRice,unpublishedopinionpercuriamoftheMichiganCourtofAppeals,issuedAugust5, 2010(DocketNo ) by the Michigan Association of REALTORS 63

VALUATION OF PROPERTY. property. REALTORS need to keep in mind first, that the Occupational Code limits what

VALUATION OF PROPERTY. property. REALTORS need to keep in mind first, that the Occupational Code limits what VALUATION OF PROPERTY I. INTRODUCTION REALTORS are often asked for their opinion on the value of a particular piece of property. REALTORS need to keep in mind first, that the Occupational Code limits what